Tickers in this Article: BZH, TOL, LEH, BSC, MCO
The credit crunch and the subprime crisis have left many different types of businesses reeling, from mortgage companies and lenders to homebuilders. (For a one-stop shop on subprime mortgages and the subprime meltdown, check out the Subprime Mortgages Feature.)

Investors have to remember that there is always money to be made in the market. In such bearish market conditions, investors should be asking which stocks could be possible plays to short sell in the near term. (To learn more, see our Short Selling Tutorial.)

#1 - Beazer Homes (NYSE:BZH)
For those unaware, Beazer Homes sells affordable homes primarily under $300,000, and among its customers are many first-time and elderly homebuyers. It operates in roughly 40 markets throughout the United States. Now here's what worries me:

1) Beazer's customers aren't among the most affluent in America. Although there's nothing wrong with that, it could be a concern if the economy continues to slow.

2) Its backlog at the end of the June quarter was 5,952 homes, with a sales value of $1.69 billion. That compares to 9,449 homes with a sales value of $2.85 billion in the third quarter last year.

3) Beazer has engaged the courts to stop the U.S. Bank National Association from declaring it in default on outstanding loans. Currently, Beazer has about $1.38 billion in loans outstanding with that institution. At issue is when/if Beazer will file its 10-Q with regulators and the lender.

4) The earnings picture isn't expected to clear anytime soon. Analysts expect the company to lose $6.55 per share this year, and to lose $1.47 per share next year.

Beazer has already taken a beating. It's at about 75% of its 52-week high. But again, I think it can still go lower. I can see the stock getting cut in half from current levels particularly as tax loss selling season hits. I think Beazer will ultimately survive, but the near term, in my opinion, could be quite bumpy.

#2 - Moody's (NYSE:MCO)
While the well-known credit rating agency may not seem like an obvious short, given that its services tend to be in demand in both good times and bad, I see a different type of risk here. I think that there could be some unforeseen legal risk in the cards.

To be clear, I don't have any information that isn't in the public domain. However, I speculate that many of the investors that have lost money investing in lenders with subprime exposure will be anxious to sue somebody in attempt to recoup some of their losses. Of course, the credit agencies that tracked companies would be one of the possible scapegoat. Regardless of whether they are at fault, at least a few lawyers will probably try to pass off the blame to them in court.

While I think that Moody's is a terrific company that will ultimately survive, and thrive, in the long-term, I think that the near term risk of litigation could make for an interesting short sell in the near-term. The company is still a solid bet for the long-term, but if news of a sizable class action lawsuit hits, short sellers could stand to benefit from a short-term dip in the stock's price.

#3 - Lehman Brothers (NYSE:LEH)
Lehman is a company with a long and impressive operating history. There's no doubt about that. However, it did have some notable subprime exposure in recent months. It announced plans to shutter its subprime division, otherwise known as BNC Mortgage. In conjunction with the closure, the company has plans to fire 1,200 people.

This operation was not overly significant to the long-term picture at Lehman. However, I don't think that will matter to the people that are losing their jobs, or to some of the Lehman investors that have ridden the stock down some 30% from it's 52-week high.

Put another way, I don't think that Lehman has heard the last of those employees, and I wouldn't be surprised if some of them were anxious to file suit (arguing that the company shouldn't have put the unit in jeopardy by making such irresponsible loans). For the record, I'm not passing judgment on whether the company was irresponsible - I am only speculating on what those individuals or their attorney's might argue.

Also, the outlook for trading and investment banking isn't exactly hot these days. In the grand scheme of things, I certainly don't think the current credit crunch will be the death knell for Lehmans. However, given the above mentioned concerns I could see this stock punching through its 52-week low by year end.

#4 - Toll Brothers (NYSE:TOL)
Toll has little, if any, direct exposure to subprime loans. In fact the people that buy the company's homes are generally more well-to-do (its average home price is said to be north of $600,000). However, investors should remember that Toll competes with a number of other medium- to high-end builders that are struggling, and who are cutting prices or throwing in perks to make their properties move.

Also, there are a growing number of existing high-end luxury homes that have come on the market in recent months, particularly in the U.S. Northeast where the company has a big presence, and I think this risk must be factored into the equation as well.

Also, Toll has been slow in providing Q4 guidance, and that tells me that it either doesn't have a good read on business conditions, or that's it's anticipating booking unforeseen charges. That is my hunch. I think the company will survive and ultimately thrive once the real estate market rebounds. But, given its lofty sales prices and high-end target market, I think it could be in pretty big trouble over the next couple of quarters.

#5 - Bear Stearns Companies
The well-known investment bank and broker is about 30% off its annual high. While a good amount of that drop is probably due to the weakness we've been seeing in the world's equity and debt markets, it is important to note that Bear has also had some subprime exposure. Its asset management division saw two of its hedge funds blow up earlier this year as the securities they were invested in (backed by subprime loans) faltered.

As in Lehman's case, this probably won't leave any long-term damage. However, I have a sense that the fallout is far from over. I wouldn't be surprised to see some investors slugging it out with Bear Stearns in the courts, arguing that the company put its funds at unnecessary risk.

Another bummer: word has it that S&P may downgrade the company's credit rating, which could make it harder for the company to finance deals. All of these worries, combined with ongoing stock market woes, make me think that the stock will continue to be a stinker in the short-term.

For the flip side of the subprime coin, check out Five Bullish Credit Crunch Plays.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

comments powered by Disqus

Trading Center