Fundamentals:
Simon Properties is the largest mall owner in America. It owns 320 mails and shopping centers across 41 states
It owes $18 billion ot banks and barely can cover half the interest on their debt every year.
One of the bearish signs earlier beginning of this year was that insiders sold more than $25 m worth of shares since Sept 2008.
Its real estate is valued at $19 billion consisting of mostly shopping malls. Against these assets, its has debts in excess of $20 billion. Its tangible net asset value is only $2.9b. Note that if the assets decline in price by 14%, its shareholders could be wiped out.
Long term debt / Equity is 3.93. P/E is 53.07. Sales Q/Q -1.14. EPS Q/Q –24.77%.
The company is a REIT company which requires them to pay out 90% of their earnings as dividends. SPG spent about $1b on dividends which was $200 more than the cash flow it earned.
Against these appalling fundamentals, why does the stock rises from 45.22 around May to 77.9 today.
The key reason is that they were able to raise some money from the re leveraging of companies with high debts since May this year.
SPG was able to raise $500m by selling stock at $31 per share and another equity offering for $800m @ $50 per share earlier this year. It diluted the shareholders value but the stock rallied because is has greatly improved its capital position.
REITs are able to use leverage to continue to operate at a capital deficit because real estate prices almost always go up. But if real estate price goes down, they will face big problems
I believe because of this SPG has rallied from $50 to $77.9 together with the general market. I have been watching this stock for the last few months and decide to go bearish today because the technical indicators are giving me a sell signal to go short.
The mortgage reset has started especially for commercial property. There will be bigger interest payment and more commercial estates are expected to collapse. So, I do not expect prices of real estate for commercials to rise.
Technical
SPG has formed a double top ( see diagram )
SPG has also reached its 61.8% Fib. retracement and not able to move up further. Its weekly chart shows clear big loss of momentum since July 09. MACD is rolling over negative and STO are breaking down
Finally underlying fundamentals are catching up and the technicals are giving a leading signal.
The stock market has risen 65% from March 2009. Any correction will bring SPG easily down to 68 which is the next support
Trade:
Buy a synthetic put for SPG
· Sell short SPG at 77.9
· Buy a protective Jan call 80@ 1.35
Cost basis : 76.55
PE: This is not a long term trade as the seller has to pay dividends. We will close the trade by Jan when the stock hits below 70. Plan to close the trade at a ROI of about 15%
SE: Sell a SP to reduce cost if the stock breaks 80 and manage it as a reversed collar. Roll the protective call up by beginning Jan if the stock shows a bullish bias.
Posts
The forming of a double top is not completed until the neckline is broken. Current setup is just a possible double top in the future.
ReplyDeleteThe price might drop to 50ma (around 69.5) in the near future. Not sure whether it will drop more.
The 50ma served as support and SPG bounces back to $74. I wish I have made some profits on it...
ReplyDeleteI got out of the synthetic put today. The Head and Shoulder pattern has no follow through the neckline.
ReplyDeleteOne lesson to learn was that the stock actually fell down to 70 but I did not get out.
Now it has gone back to >75 and maintaining strength despite the fall in the SPX today.
I decide to get out mainly because I do not want to hold on to a short position with high dividend.
The loss for this trade is about 9%.