When investing in the markets folks have to be conscious of the upside potential of a security, and at the same time be able to accept when a stock becomes overvalued. This is generally a difficult skill to acquire as most folks look to invest in a company for the long-term, hoping for appreciation over time. The retail investor who invests through their 401ks and other defined contribution plans all buy and hope the fund will be worth more in the future. The more astute investor and a bunch of hedge fund managers not only look for hidden gems, but also invest (in other ways) their capital in companies that are overvalued.
David Einhorn, founder and president of Greenlight Capital has initiated a bunch of short positions such as Allied Capital (NYSE: AFC), Lehman Brothers and Green Mountain Coffee Roasters (NASDAQ: GMCR). The press usually pegs him as a “destroyer of companies,” but most of the time he correct that the company’s stock is overpriced. When evaluating financial statements and looking at the company’s core operations and products, many managers believe they can gauge whether future earnings are correctly priced into the stock. When a company has an earnings potential shortfall or has a stock price that has run up too far too fast, many managers will short the company’s stock. This seems to be the case with Kforce.
Kforce Inc (NASDAQ: KFRC) provides professional and technical staffing services and solutions in the United States. It operates in five segments: Technology, Finance and Accounting, Clinical Research, Health Information Management, and Government Solutions. The stock is trading just above $14.50 a share, with a 52-week range of $9.57 to $14.92. The company recently hit its 52-week high of $14.92 on December 28, and pulled back slightly. Less than a couple of months ago the stock was trading as low as $10.32, but over the last 6-weeks there has been a considerable move to the upside (about 29%).
The company announced earlier this quarter that a special dividend payout before the New Year of $1.00 a share will be distributed, equating to a total payout for Kforce of $36 million. This has been a common practice by many companies due to the previous uncertainty surrounding the fiscal cliff, and becoming more focused on the dividend tax that will be applied in 2013. It can be viewed as a negative as some would argue that dividend is being pushed up so that investors stay in the stock, and do not flee due to other reasons. On the flip side a special dividend distribution may also be viewed as a company rewarding its shareholders, and allowing them to avoid a potential dividend tax hike. In the case of Kforce it appears that the former applies.
There has been an extreme amount of insider selling in the stock as of late, which causes concern about the company’s near term performance. Ralph Struzziero filed to sell 4,000 shares in December. Howard Sutter (Officer & Director) sold 40,000 shares in December. Richard Cocchiaro filed to sell 364,399 shares in December. Despite the considerably strong insider selling, the stock has appreciated during the month of December, a few dollars shy of its 5-year high of $17.55 on February 7, 2011.
Despite the environment for professional staffing viewed to be positive by the company, its last earnings report was not stellar. Revenues from continuing operations for the quarter ended September 30, 2012 were $270.2 million compared to $274.1 million for the quarter ended June 30, 2012, a decrease of 1.4%. With outlook growing more uncertain due to many macroeconomic headwinds, the company is expected to suffer at least for the first half of 2013. After such a tremendous run to the upside, a grim outlook (as stated by the CE), and strong insider selling, investors should look to sell short KFRC over the next few months.
Heading into the fourth quarter 2012, the most shorted stocks were First Solar (NASDAQ: FSLR), JC Penny (NYSE: JCP) and GameStop (NYSE: GME). Their short interest vs. the public float was 47%, 40% and 36% respectively.