In May of 2008, James Montier, a fund manager at GMO LLC, couldn't find attractive investment opportunities, so he wrote an article about short selling entitled “Joining the Dark Side: Pirates, Spies and Short Sellers.” His research found that the ideal short candidates are companies that have the following three characteristics:
- A price-sales ratio higher than 90% of the industry.
- A Piotroski F-Score of 3 or less.
- Double-digit average annual asset growth over the past five years.
Dubbing these three criteria as the “Unholy Trinity,” Montier found that companies with any of these characteristics typically underperformed the market.
Companies with extraordinarily high price-sales ratios tend to be “story stocks,” meaning that investors have bid up their share prices to eye-watering levels based solely on the attractive story presented by their business, and not on ability to generate revenue. A low Piotroski F-Score indicates a poorly run business with weak financials. While high asset growth isn’t always a bad thing, it can be when combined with poor financials and overvaluation.
GuruFocus offers the James Montier Short Screen, a screen based on Montier’s short strategy. Because asset growth isn’t necessarily a bad sign (it’s typically only bad if the asset growth is due to excessive borrowing), it is not included in the screen by default, but it can be added back in by going to the “growth” tab and selecting a five-year asset growth rate minimum of 10%.
Based on the screen, let’s take a look at four stocks that investors may want to avoid based on Montier’s criteria. The first two, Live Nation Entertainment Inc. (LYV, Financial) and Hannon Armstrong Sustainable Infrastructure Capital (HASI, Financial), meet the asset growth rate criteria. However, NextEra Energy Inc. (NEE, Financial) and Carnival Corp (CCL, Financial) do not; for these two stocks, I replaced the asset growth criteria with debt growth, as debt growth can be a worse sign than asset growth in many cases.
Live Nation Entertainment Inc.
Live Nation Entertainment Inc. (LYV, Financial) is a company that promotes, operates and manages ticket sales for live entertainment in the U.S. and internationally. Its price-sales ratio of 16.45 is higher than 92% of industry peers. The company has a Piotroski F-Score of 3 out of 9, indicating poor business operation, and a five-year asset growth rate of 12.30%, which has been largely due to debt.
On Oct. 6, shares of Live Nation traded around $99.08 for a market cap of $22.13 billion. The GuruFocus Value chart rates the stock as significantly overvalued.
Analysts seem to have high expectations for this company, as Wall Street estimates that its revenue will rise to $12.2 billion for full fiscal 2022 compared to $4.7 billion in 2021. Before the pandemic, Live Nation reported revenue of $11.5 billion for 2019. Live Nation has an attractive pandemic recovery story, but its stock trades above the estimated GF Value for 2022, even with Wall Street’s lofty revenue expectations. The company will also have to contend with a higher debt burden.
Hannon Armstrong Sustainable Infrastructure Capital
Hannon Armstrong Sustainable Infrastructure Capital (HASI, Financial) is a real estate investment trust (REIT) that is focused on investments in climate solutions. Its price-sales ratio of 22.30 is higher than 90% of industry peers. The company has a Piotroski F-Score of 3 out of 9, indicating poor business operation, and a five-year asset growth rate of 15.20%, which has been largely due to debt.
On Oct. 6, shares of Hannon Armstrong traded around $53.50 for a market cap of $4.19 billion. The GuruFocus Value chart rates the stock as significantly overvalued.
It seems Wall Street doesn’t think much of this company. For full fiscal 2022, the average revenue estimate from analysts surveyed by Morningstar is $92 million, a decline from the 2021 expectation for revenue of $110 million. In 2019, the top line was $142 million. These numbers may seem overly pessimistic at first; after all, this company has a great story of investing in a future with sustainable infrastructure. However, a great story isn’t always enough to make up for an overly high valuation or financial troubles.
NextEra Energy Inc.
NextEra Energy Inc. (NEE, Financial) is an electric utility holding company with operations in the U.S. and Canada. Its price-sales ratio of 9.28 is higher than 90% of industry peers. The company has a Piotroski F-Score of 3 out of 9, indicating poor business operation. Long-term debt has increased 15.22% per year over the past five years, while total assets have a five-year growth rate of 9.20%.
On Oct. 6, shares of NextEra traded around $53.50 for a market cap of $155.60 billion. The GuruFocus Value chart rates the stock as significantly overvalued.
According to analysts surveyed by Morningstar, Wall Street is expecting NextEra to grow its revenue to $19 billion in 2021 and $21.3 billion in 2022. Before the pandemic, revenue was $19.2 billion in 2019. This company is a global leader in building clean energy infrastructure in North America, providing sustainable solutions for the growth in energy demand. However, in order to provide value for shareholders at the current level, it will need to begin growing its profits and assets faster than its debt.
Carnival Corp (CCL, Financial) is a British-American cruise operator and the world’s largest travel leisure company. Its price-sales ratio of 42.35 is higher than 94% of industry peers. The company has a Piotroski F-Score of 2 out of 9, indicating poor business operation. Long-term debt has increased 44.49% per year over the past five years, while total assets have a five-year growth rate of 3.60%.
On Oct. 6, shares of Carnival traded around $24.75 for a market cap of $28.89 billion. The GuruFocus Value chart rates the stock as significantly overvalued.
At its peak in 2019, Carnival brought in revenue of $20.8 billion for the year. Wall Street is expecting revenue to grow from $2.9 billion in 2021 to $17.1 billion in 2022. When Carnival’s operations ground to a halt during the beginning of the pandemic, the company immediately had to scramble to figure out how to keep making its already-massive debt repayments. The solution was to more than double its debt, which it was able to do because junk bond investors were optimistic about its post-pandemic recovery. While Carnival’s recovery will certainly benefit investors in its debt, that won’t necessarily translate to benefits for investors in its equity.