Today I opened a short position in Brunswick at an average price of $15.98. I also bought some September 2010 22.5 put options between 7.00 and 7.10. This is now my largest short position.
I don't have time to explain my position in comprehensive detail but here are a few highlights:
*) Brunswick has had a spectacular short-term run on no news and is now selling above analysts' median target price of $15.
*) There have been a handful of insider sales in recent days, including a material sale of $802K.
*) The boat industry is under severe strain and the outlook remains very questionable.
*) BC's sales were down sharply in the most recent quarter despite the fact that many other consumer discretionary companies saw moderate sales upticks in Q409.
*) Roughly 90% of BC's book equity has been wiped out since 2005. Their balance sheet has become increasingly stressed and there don't appear to be any near-term catalysts for improvement given the negative outlook for earnings.
*) Gross profit margins have been falling sharply. The boating industry in general has very little pricing power in today's economic environment, especially given the glut of used boats on the market.
*) The boating industry is extraordinarily sensitive to gas prices.
*) Recreational businesses were big benefactors of the home equity lending boom of the mid 2000's. There will be no repeat of this type of boom even if the economy recovers.
*) Company has a significant underfunded pension obligation. The plans were underfunded by $418.7mm as per the company's most recent 10K. This obligation is likely to be a drain on cash flows well into the future.
*) Despite its large cash position, Brunswick carries a fair amount of debt and has a high fixed cost structure. In my opinion, it is a candidate for bankruptcy over the next 3-5 years, especially if there is a double-dip recession.
*) The markets in general and consumer discretionary stocks in particular are very overbought. Now is a good time to engage in short positions.
*) VIX is very low at the moment so options are relatively inexpensive. Holding all other variables constant, longer term options should rise significantly in value if VIX spikes.
Disclosure: Author is currently short BC and also owns put options. Position is partially hedged with a long position in VCR (Vanguard Consumer Discretionary ETF). Author trades frequently and may quickly exit position if pre-determined stop targets are hit.
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