‘Conviction Shorts’

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Bernstein’s famed Black Book this month listed five U.S. companies, and 21 overall, under what it called “ Conviction Shorts “, for companies which are priced too high, have specific problems as an industry involves or where the industry itself has issues.The five top conviction shorts on the list are: Best Buy, Kellogg, Express Scripts, Viacom and Intel.

We  take a quick look at the five Conviction Shorts U.S. companies, along with Bernstein’s rationale for shorting them and counter-arguments

Conviction Shorts – top five stocks

Viacom: It is not the first time Bernstein has warned about Viacom, whose portfolio includes MTV and Comedy Central. In 2015, it compared the media giant with Eastman Kodak, a fallen one. Bernstein believes earnings estimates for Viacom and the stock’s valuation (~8-9x EV/EBITDA) are too high. Even in a “blue sky” scenario, the stock could only reach the mid-$50s/share, and that would only be for a moment in time, it said. Its best-case scenario: $29.

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Conviction Shorts

In contrast, Guggenheim Securities last month rated Viacom an “attractively priced albeit high-risk media opportunity.” It set a price target of $50. Viacom shares also got a nice bump up after renewing a deal with cable provider Altice last month.

Best Buy: For years now, the consumer electronics retailer has struggled to fight off online competitors led by Amazon. Bernstein says the big box retailer shows no signs of winning the structural battle in the long run. Best Buy might benefit from the iPhone 8 launch later this year, but the stock's recent rally has priced the potential gains, claims Bernstein as it put an underperform, and a long-term bearish call, with a $47 price target.

But a notable opposing voice comes from Loop Capital’s Anthony Chukumba. The analyst remains bullish on the stock despite a recent 20% rise to an all-time high of $61.95. Chukumba has set a target of $72 and wrote the following:

“We believe Best Buy was previously thrown into the same valuation bucket as ‘secularly challenged retailers such as GameStop (GME) and Staples (SPLS), but should now trade in line with ‘market leading, relatively slow growth retailers such as Home Depot (HD) and Wal-Mart Stores (WMT).”

Kellogg: Bernstein’s renewed move on this cereals giant comes after a downgrade to underperform in March. The reason: it believes “another shoe is about to drop for the U.S. packaged food companies, as volume trends appear to be weakening still further.”

Bernstein’s gloomy outlook on the stock is shared by a number of others on account of a number of secular factors at work. Among them are a flight to healthier choices, reallocation of shelf space by retailers in favor of fresh products and smaller challengers. Bernstein has set a target price of $62.

In recent weeks, the nation’s second-largest cereal maker has announced hundreds of layoffs at warehouses in three states as it plans to ship boxed products straight to stores, fighting a years-long slowdown.

Express Scripts: This stock has already been beaten down 20% this year. Still, Bernstein believes it could go a lot lower, to $49, primarily because the largest Managed Care Organizations plan to insource Pharmacy Benefit Managers and Express Scripts expects to lose the Anthem contract.

This month, Express Scripts also became a target of a suit over EpiPen, the pricey allergy treatment that last year outraged the nation. Many analysts expect drugmakers and PBMs to face political heat on account of drug price inflation.


Intel: Bernstein says Intel’s critical datacenter business is “beginning to crack.” That is not all. Continued decline of PC business and slowdown of Moore’s Law also go against the chip giant. Worse, the stock is “expensive,” trading at over 19x EV/FCF. Target price: $30.

Macquarie maintains an “outperform” on Intel as the company is on course for an earlier launch of its new Coffee Lake chipmaking platform. But Kumquat Research points at a new threat from a decades-old AMD, saying the smaller chipmaker “isn't just back, it is resurgent.”

As with most stocks there are smart investors on both sides of the trade, and regardless, individuals should conduct their own research.

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