For Those Who Feel Like Selling California Short
Is it time to short the Golden State?
Taxes and unemployment are way up, businesses are moving out, commercial real estate is frighteningly overbuilt and the state’s budget woes seem only temporarily on hold.
Not even the weather is cooperating anymore: It’s late July, but morning clouds still dog Southern California like an unrelenting head cold.
For stock market trend players who have watched other regional economies crumble through the years, California now appears to be a gold mine of short-sale ideas. Short sellers bet on lower stock prices: They borrow shares and sell them, betting they can repay the stock loan in the future at cheaper prices. If they’re right, their profit is the difference between the selling price and the cost of buying back the shares later.
In California, the game now is to find companies that are heavily dependent on the health of the state economy. If the Golden State indeed sinks into a far deeper slump than most people now foresee, those companies’ stocks could plummet--a bonanza for the “shorts.”
It’s important to understand that this is nothing personal. Most short sellers are just opportunists who simply believe one might as well profit from a trend if there isn’t much you can do to change it.
The accompanying table lists some key California companies that derive a significant or majority share of their sales and earnings from operations within the state. The banks, such as Security Pacific and Wells Fargo, are pretty obvious choices. Some others are less so:
* Highway construction firm Kasler has already seen its stock zapped from $15.50 earlier this year to $9.875 now on worries about a possible slowdown in road-building.
* Home builder Kaufman & Broad has fallen from $17 to $10.375 as investors have grown uneasy about another downturn in new-home orders. Analyst Lawrence Horan at Prudential Securities says K&B; is warning analysts that orders are running 25% below last summer’s pace.
* Shares of utilities such as Pacific Telesis (Pacific Bell) and Pacific Enterprises (Southern California Gas) are being held down in part by concerns about fewer new hookups if housing starts and business start-ups slide anew.
* Supermarket chain Vons has had its stock crunched in recent weeks on fears of an all-out price war among Southland grocers if consumers grow even more wary about spending money. “They (supermarkets) are not recession-proof,” warns one New York-based short seller. “Just look at what happened to the A&P; chain in the Northeast this year.”
Are all of these California stocks headed still lower? Maybe not all. As Los Angeles money manager Richard Kayne of Kayne, Anderson & Co. puts it: “I’ve got a pit-of-the-stomach discomfort with California now, but I can’t tell you that I’ve thought about shorting it en masse .”
Even so, all of the stocks are worth watching if you fear that many more jobs will be lost in California over the next year or so and that many more businesses will go belly-up. All of these companies could be hurt much more severely than Wall Street now suspects, insofar as those painful trends would affect consumer, corporate and government spending on goods and services.
If it seems unfair to paint these companies with the same broad brush, think back to the Farm Belt depression of the early ‘80s. The farm machinery firms dependent on that region were classic short-sale targets then, and rightly so: Deere & Co. shares slumped from $42 in 1983 to $21.50 by 1986. Varity Corp. fell from $6.75 in 1983 to $2 by ’86.
Or how about Texas in the mid ‘80s? If you had shorted the stocks most associated with that economy--oil drillers--you’d have minted money. Between 1984 and 1986, Baker Hughes went from $23 to $9, Smith International from $21 to $2.
California’s advantage, of course, is that it is a much more diversified economy than the Farm Belt or Texas. But that only gets you so far. When many of your key industries are ailing--real estate, aerospace, agriculture, energy--the total effect can still prove devastating, especially on firms dependent on consumer spending. Just ask all those New Englanders who also argued two years ago that they were “well diversified.”
If you would never dream of selling a stock short, join the crowd. It’s certainly not for most people. As Seal Beach money manager Dan Sullivan notes: “You have to have the timing just right.”
And even then, you can get caught in a “short-squeeze,” which is what happens when too many short sellers rush to buy back a stock at once, sending the price soaring even if the fundamentals remain awful. Rather than sell a questionable stock short, Sullivan says, “If I don’t like the market, I’d rather just be out of it.” For owners of California-dependent stocks, that might be the best advice of all for a while.
Shorting California If you want to bet that California’s economy is on the verge of a dramatic plunge, here are some of the stocks that might go with it--potentially making them “short-sale” candidates for the very gutsy--and pessimistic--trader/investor.
52-week Tues. 1991 Stock high/low close change Carl Karcher 9 7/8-5 1/2 9 +47% Kasler Corp. 15 1/2-6 9 7/8 -23% Kaufman & Broad 17-5 3/8 10 3/8 +12% Leslie’s Poolmart 13 1/4-7 9 3/8 -15% Pacific Enterprises 43 3/8-24 1/4 27 3/8 -30% Pacific Telesis 47 1/2-36 1/4 40 3/4 -10% Security Pacific 34 7/8-17 23 1/4 +13% Unocal 34 1/2-21 3/4 24 5/8 -6% Vons 34 1/8-14 3/4 28 7/8 +28% Wells Fargo 98 3/4-41 1/4 69 1/2 +20%
All stocks trade on NYSE except Carl Karcher, Kasler and Leslie’s Poolmart (traded on NASDAQ)
