Instead of searching for hidden gems, the managers of AdvisorShares' short-only Ranger Equity Bear fund spend their days scouring the stock market for sinking ships.
Brad Lamensdorf and John Del Vecchio, co-managers of the exchange-traded fund, have targeted four companies they believe will cut dividends because of cash-flow problems, making them less attractive to investors:
-- Diebold Inc., a North Canton, Ohio, company that makes ATMs, voting machines and security equipment. Its stock is down 5% this year. "Almost all of the company’s cash is domiciled in foreign jurisdictions. Free cash flow will likely be at least a $25 million shortfall with $75 million in dividend payments. While they may raise debt to fund the dividend, there’s much safer dividend plays out there."
-- CenturyLink Inc., a Monroe, La., communications and cloud-hosting company. Its stock is down 15% this year. "Company already cut [its] dividend once this year, which we predicted due to poor sustainable cash flows from a capital lease transaction. This business is under intense pressure and the income statement is being squeezed."
-- Windstream Holdings Inc., a Little Rock, Ark., telecommunications company. Its stock is up 4% this year. "Free cash flow barely covers dividend. ... In the first half of 2013 there was a $40 million shortfall. ... Company has a $400 million underfunded pension."
-- Consolidated Communications Holdings Inc., a Mattoon, Ill., telecommunications company. Its stock is up 13% this year. "[Second quarter] revenue declined over 1%, and missed expectations. ... Cash balance is the lowest in the company’s history."
Windstream spokesman David Avery noted: "On Oct. 15, we paid our 29th consecutive 25-cent quarterly dividend." The company also boasts in an investment brochure: "Our business model supports our $1 annual dividend payment through consistent cash generation and the improving trajectory of our financial performance."
Matt Smith, treasurer and vice president of finance for Consolidated Communications, said: "We build cash on the balance sheet to use in ... acquisition[s] that also improve the balance sheet. The SureWest acquisition met this criteria, so we did use a significant portion of our cash on the balance sheet for the acquisition. Now that most of the non-recurring costs tied to the acquisition are behind us, consistent with past practice, we will begin to build cash on the balance sheet again for the next opportunity."
CenturyLink declined to comment and Diebold did not respond to a request for comment.
As far as investments go, this hasn't been a good year for Ranger Equity Bear Fund. The fund has lost 22% this year as the stock market surged, while the broad Standard & Poor's 500 index up 23%."
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