5 Candidates for 2013's Best Short


Though in reality it can be a pretty arbitrary choice of times, the end of each calendar year usually serves as a good time to look toward the future. Many of our Foolish contributors have been giving their thoughts on Things to Come in 2013.

Not wanting to miss out on the party, I've gone searching for some of the best stocks to short -- or at least stay away from -- in the upcoming year. Read below to find out what the five candidates are, and at the end I'll offer up access to a special premium report on one of them.

Brick and mortar is so 20th century
If there's one trend that's been accelerating since the new millennium, it's the use of the Internet to get shopping done in North America. That said, online sales accounted for only 9% of all sales in the United States in 2011, and it will surely never get anywhere close to 100%.

But the overall trend is undeniable, and the trend is not the friend of certain industries: none more so than big-box retailers. Customers can already go into RadioShack , scan the codes of certain products on their smartphone, and see how much cheaper they could get the goods elsewhere.

The same could be said for Best Buy , a company that has seen its earnings shrink by 65% over the first nine months of 2012. Some of that is due to a 2% contraction in revenue -- a move some believe is due to the fact that the company has apparently lost sight of its roots, as the customer service has gotten progressively worse.

One company trying to pick up the customer service slack where Best Buy has left off is hhgregg . The company is intentionally focused on selling similar products as Best Buy, but with a superior customer service experience. Though the company benefits from the ability to rapidly grow in the same physical locations where Circuit City franchises met their end, its rapid expansion is certainly at odds with the growing e-commerce trend.

hhgregg bulls will point toward the company's positive revenue growth and expanding footprint as a sign that it's different than the Best Buys and RadioShacks of the world. But hidden in those numbers is the sobering fact that comparable-store sales have declined by 7.2% over the last six months. For the time being, the only thing propping up hhgregg's revenue growth is opening up new stores -- there's no organic growth to speak of.

The last two years have been rough on these three companies, as they've lost 65%, 87%, and 64%, respectively, over that time frame. Some may say these three are bound to bounce back, but I think on the way to a stock price of $0, there's still a lot of room to fall.

Two dividends that are unsustainable
One sign that a company is at risk of going down is when it has an unsustainable dividend. Many investors, especially those nearing retirement, own dividend-paying companies because they tend to be more solid and steady businesses.

But that's not always the case. As I've already shown, Windstream , a telecom that offers phone and broadband services in part of rural America, is living on the edge. The company already uses 101% of its free cash flow to pay out its outsize 11.4% dividend. In plain speak, that means that it's giving away more money than it is taking in on a yearly basis. Unless the company can turn things around and gain business customers fast, that's a recipe for disaster.

And finally, we have Pitney Bowes , the company that got its start in mail-metering machines. Although the company has obviously diversified its offerings since then, it is suffering just like its former public counterpart -- the U.S. Postal Service.

Over the first nine months of 2012, every division of Bowes' business -- including equipment, software, rentals, and business services -- has seen revenue dip. Overall, revenue is down 5.6% and earnings are down 6.2%.

If there's one silver lining for the company, it's that Bowes is only using 72% of its free cash flow to pay out dividends. But even there, there's a troubling trend. Though the dividend payments have remained the same, the payout ratio last year was just 36%. This means that the company has seen its free cash flow decrease by an astounding 50% in just one year's time.

What's a Fool to do in 2013?
Stay tuned, as later this week I'll be revealing my pick for best short of the upcoming year. In the meantime, I suggest reading up on the situation at Best Buy.

After what might have been its most tumultuous year in history, there are now even more unanswered questions about the future for the big-box electronics retailer. Will old leadership take the company private? Will a smaller store format work out for both the company and its brave investors?

To help answer all these questions, The Motley Fool has released a new premium research report detailing the opportunities -- and the risks -- in store for Best Buy. Simply click here now to claim your comprehensive report today.

The article 5 Candidates for 2013's Best Short originally appeared on Fool.com.

Fool contributor Brian Stoffel has no positions in the stocks mentioned above. The Motley Fool owns shares of Best Buy and RadioShack and is short RadioShack. Motley Fool newsletter services recommend hhgregg. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published