Down With Molech! Shorting the Child Sacrifice Business (BFAM,QQQ)

Today’s is a purely speculative bet on a company with a saccharine name and – in our lofty opinion – a business that has no business remaining in business.

More in that in a moment, though.

First, we want to wish you all a faith-filled Sukkot holiday, and good weather to boot.  There’s nothing so spiteful as an October chill – or worse, a downpour or snow dump – to make life in the sukkah a dreadful bore.

That said, on to our trade…

The outfit we’re rendering unfit today is Bright Horizons Family Solutions (NYSE:BFAM), operators of 1100 institutionally administered day care centers across the English speaking world.

We’re not of a mind that these institutions are healthy for anyone, regardless of how professionally run (or profitable) they may be.

Why?

Because day care is not child rearing.

On the contrary.

Day care is an abdication of parental responsibility.

And it’s done in the interest of money.

And nothing else.

And now on to our trade…

To begin, the stock is not cheap.

1. It trades with a P/E of 59, and a Price to Book of slightly more than 10 (youch!).
2. There’s no dividend, and although the company has grown earnings by close to 70% a year for the last five years, she’s used a substantial amount of debt to accomplish that. Debt to Equity is an inflated 1.19.
3. Price/Free Cash Flow is an exorbitant 45.40.
4. And to top it off, insiders have shown little faith in the company’s fortunes. Of 65 insider transactions over the last year, not one was a buy.
5. And the sales? North of $30 million worth of sales were registered in just the last six months, amounting to a liquidation of 24.15% of all insider holdings.

Newsworthy?

We think so.

But even more so, is the company’s chart for the last six months.

Have a look –

Technically, we have –

• An overbought RSI read back in July (in green). (A weekly overbought signal was also registered in late June – not seen here.)
• We have a gap that needs filling between 141 and 144 (in black),
• A textbook Head and Shoulders topping pattern (in red), whose downside count would bring the stock down to 127, and
• Negative divergence on both RSI and MACD indicators (green lines), pointing toward additional weakness going forward.

In short, we’re looking for a clear break below the H&S neckline (in blue) to carry the stock considerably lower.

And we’re playing it like this –

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew