When stocks are falling back down to earth after flying high… many investors take this as green light to profit from their declines.
That’s something we’ve seen plenty of this year. Some of the most popular trades have been to short unprofitable growth companies. That includes names like Bed Bath & Beyond, Carvana, and MicroStrategy.
But sometimes, these short sellers are a bit too quick to throw out the baby with the bathwater.
As I told you yesterday when sharing the story of Farmland Partners, shorting a stock means betting its price will fall. When an investor makes a short sale, they borrow shares from their broker and sell them, in hopes of buying them back later at a lower price.
It’s a logical strategy in a bear market when prices keep going down… But shorting a stock is risky business.
If the price goes up instead of down, the short seller loses money. Plus, they’re on the hook for interest from borrowing shares and must cover any dividends the company pays while they’re borrowing shares.
We’re still facing a lot of volatility, though, with the S&P 500 down around 17% this year. And these conditions have created a short seller’s dream.
According to Bloomberg, the number of new short positions on trading platform eToro grew 61% over January to August this year from 2021. And 41% higher than 2020.
Emboldened by their success, some short sellers are now taking aim at stocks they’d be better off not betting against.
Here at Wide Moat Research, we take short reports seriously. But at the end of the day, we form our own opinion based on a company’s fundamentals combined with management interaction.
Today, I’ll tell you about three real estate investment trusts (REITs) short sellers are betting against. Based on our research, they’re fundamentally sound and aren’t at risk of failing.
It’s easy to get caught up in the hype of selling shorts when the market is going down, so paying attention to these stories today could help protect you from taking unnecessary risks… And for those who can see beyond the noise, this represents a great chance to get involved with them at a discount.
Three Short Trades to Avoid
When it comes to REITs, you want to be even more careful when shorting shares than regular companies. That’s because the land on their balance sheets is an asset that will always have value.
By digging below the surface, we know some of the REITs that these short sellers are targeting are being unjustly punished.
The first is Medical Properties Trust (MPW), which owns a portfolio of hospitals.
Named one of the best short ideas at Hedgeye, the argument is the company’s core business is deteriorating and overvalued as its largest tenant is having trouble covering rent.
The rising costs of the hospital operators due to inflation are straining profitability as reimbursement rates from the government have not caught up.
But, Medical Properties Trust knows that these are short-term issues. In the latest earnings call, CEO Edward Aldag noted that hospitals are generally paid after services are rendered. So current reimbursements rates aren’t reflective of the increased cost of care.
He allowed the changes to be reflected immediately, but the company’s operators are working on bringing down cost, increasing reimbursement rates, and improving coverages within Medical Properties Trust’s portfolio over the long term.
At the end of the day, hospitals are mission critical infrastructures. If they are forced to close, people die.
Medical Properties Trust is likely to get the rent it’s due. With shares trading at the lowest valuations since the Great Recession and a 10% dividend yield, shorts will have a hard time squeezing out profits.
Next up is Hannon Armstrong Sustainable Infrastructure (HASI), which focuses on climate-related solutions.
Hannon Armstrong was the target of a short report by Muddy Waters, which took issue with its accounting practices and claimed its business was uneconomic and built on exaggerated values and abusing tax incentives.
When we investigated, we didn’t find any hard evidence of foul play, but also could not completely refute the short seller’s claims. The truth is the company’s accounting is complex. And some parts, such as estimation of the value of tax credits, are open to interpretation based on different assumptions.
But given the company’s long track record and clean audit history, we’re willing to give it the benefit of the doubt.
And accounting issues aside, Hannon Armstrong is in a prime position to benefit from a surge in renewable energy projects thanks to the recently passed Inflation Reduction Act.
Despite rising interest rates, the company is positioned to continue to grow without accessing the public debt markets. With the company targeting 10-13% earnings-per-share growth and 5-8% dividend growth through 2024, this doesn’t seem like a good candidate for shorting.
This Company Represents a Great Opportunity Today
The final company I want to tell you about has faced criticism of becoming obsolete. But it just reported a record-high number of bookings in its latest quarter and a development pipeline with the strongest levels of pre-leasing in four years.
I even visited one of its properties this week. And I think it’s positioned to benefit from some of the fastest-growing companies in the country. That’s why I put together a presentation to tell you more about it. You can watch it here to learn more about it.
While short sellers may be right in targeting the wildly overvalued, unprofitable companies in the stock market… I think their recent success has led them to take risky bets on companies that are fundamentally sound.
For investors willing to do their homework, the fear created by short reports can be a great opportunity to scoop up shares of good companies at fire-sale prices.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily
P.S. This week, I’m attending the REITworld conference and meeting with some of the most successful minds in the space. It’s by picking their minds that I’m able to combine the research we do here at Wide Moat Research with their experience, strategies, and management skills… and see whether shorting their companies makes investment sense – or could result in a big mistake.
For those who aren’t as familiar with REITs and why I love them as income investments, I want to extend a unique opportunity to you. If you have any questions for the CEOs I mentioned last week, please submit them here. I’ll be sure to share the answers I receive in a future Reader Mailbag edition.