We leverage our Robo-Analyst technology to monitor 3,000 stocks across all sectors and issue Danger Zone reports to help clients avoid portfolio blowups. Position Update reports serve as notification that a previous investment idea’s risk/reward profile has shifted and the position has been “closed”.
Verifone Systems (PAY: $19/share) – Closing Short Position – Down 50% vs. S&P +20%
PAY was selected as a Danger Zone pick on 12/18/14. The stock received an Unattractive rating at the time of the report. Our investment thesis highlighted: 1) declining margins, NOPAT and ROIC; 2) the commoditization of the point of service business; and 3) the overly optimistic expectations baked into the stock price.
During the subsequent 965 day holding period, PAY outperformed as a short position, falling 50% compared to a 20% gain for the S&P 500. This underperformance was largely a result of disappointing revenue results during 2016 that caused significant damage to forward earnings expectations. 2017 and 2018 Wall Street consensus estimates for PAY have declined ~30% over the past twelve months.
Figure 1: PAY Stock Price and Risk/Reward Rating History
Sources: New Constructs, LLC and company filings
Since our original Danger Zone report, PAY has retained its Unattractive rating. While fundamental issues remain, such as a bottom-quintile ROIC and a challenging competitive landscape, we are inclined to take profits. Consolidation within the payments industry increases “stupid money risk.” We hope investors avoided this portfolio blowup or participated in the 50% short return.
This article originally published on August 14, 2017.
Disclosure: David Trainer, Kyle Guske II, and Kenneth James receive no compensation to write about any specific stock, style, or theme.