(** UPDATE - 2/12/2016 - See Bottom**)
My Bear Alert for today is Realty Income Inc (O - NYSE). I can't call it a bad company, at least not yet. But it still trades at a high premium.
P/E = 51.62
Forward P/E = 53.07
PEG = 11.39
P/Sales = 14.08
I'm going to save the compelling piece for last, the 2 things that made it today's alert. With a market of Fed tightening, there's no way I can see that multiples like this will be sustainable. don't kid yourself, Janet NEEDS to tighten and very soon (more on that in my special post later today). The PEG ratio says that by this time next year the earnings will be 453% higher than what they are today. How?
Do they expect to raise rents by that much? Will they be able to accumulate that much more realty in that time while paying out at least 90% of taxable earnings as dividends.
Call me a Descartian skeptic, but I'm not buying these share prices. Assume you bought shares today. If you took your portion of the sales alone as cash, it wold take 14 years to get your money back. To me, that's priced for perfection.
So here are the two reasons it's on today's alert:
1: O is trading at it's all time highs, in a market that shuns high multiples, with looming bankruptcies in the oil market, and credit stress around the globe - risking bank failures, and economic slow-downs in many countries.
2: (The most compelling item) - The PRICE TO CASH Ratio is nearly ONE THOUSAND NINE HUNDRED AND NINETY SEVEN (Share Price = 1997 * CASH). It almost seems ironic, no? If there are problems, there isn't enough liquidity to help.
While I haven't looked over the balance sheet, there are plenty of reasons for this to be a short term paper-swing as a short.
As always, this blog is about PAPER TRADING, so don't go throwing your money into any investment long or short without doing your own homework and Due Diligence.
UPDATE (2/11/2016):
I just looked through last night's reported balance sheet, and need to uupdate a few pieces of information:
1) The Price to Cash ratio now looks to be only about 345 rather than the 1997 from prior to their earnings report.
2) The debt of the company has come down and the net shareholders' equity has increased by just over $900M from last year.
This certainly looks to be a well managed company, with growth - just like Netflix (NFLX). Netflix just expanded to 130 new countries versus 3-5 expected. Take a look at how the market reacted to their price multiples.
So, the question is: Did last night's earnings report by O changes my bearish thesis?
My answer is: No. My bearish thesis is only short term. They are trading at a peak with high multiples in a market that is spurning such numbers. O is Oversold. So for a short term swing, I would paper-trade the short sell or Put options.
UPDATE (2/11/2016):
Right now the Feb19 $60 Puts are trading at about $0.50.
Now look at this WEEKLY chart:
It looks like EVERY TIME it jumps like this for a full week, the next week is a STUNNING AND PRECIPITOUS TUMULT. And it tends to go for WEEKS afterward.
I'd say to set your paper-trade RIGHT NOW. You could try it as a short, or your could paper-trade the PUT options.
Have a great long weekend everyone!
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