Michael Kors Holdings Ltd (KORS), Zillow Inc (Z), Zale Corporation (ZLC): Three Stocks to Get on Your Watchlist

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I follow quite a lot of companies, so the usefulness of a watchlist to me cannot be overstated. Without my watchlist, I’d be unable to keep up on my favorite sectors and see what’s really moving the market. Even worse, I’d be lost when the time came to choose which stock I’m buying or shorting next.

Today is Watchlist Wednesday, so I’m discussing three companies that have crossed my radar in the past week — and at what point I may consider taking action on these calls with my own money. Keep in mind that these aren’t concrete buy or sell recommendations, nor do I guarantee I’ll take action on the companies being discussed. What I can promise is that you can follow my real-life transactions through my profile, and that I, like everyone else here at The Motley Fool, will continue to hold the integrity of our disclosure policy in the highest regard.

This week, I’m devoting my three picks to short sellers looking for high-risk, high-reward ideas.

Michael Kors Holdings Ltd (NYSE:KORS)

Michael Kors Holdings Ltd (NYSE:KORS)
Trust me, I get it! Michael Kors Holdings Ltd (NYSE:KORS) looks completely unstoppable as it pushes further into Europe and opens up bricks-and-mortar stores left and right in the United States. Consumers’ seemingly insatiable appetite for brand-name products at reasonable prices is what’s fueled Michael Kors Holdings Ltd (NYSE:KORS) to same-store sales growth in excess of 30% in numerous quarters — and yet, I’d say it’s time to rally the troops against this company.

In the first quarter, Michael Kors Holdings Ltd (NYSE:KORS) again delivered more of those stunning results: 27.3% comparable-store sales growth and 54% first-quarter revenue growth. However, these results will not stand the test of time as no retailer has been able to survive the fickle spending and buying habits of consumers for longer than a few years.

I’m certainly not going to take anything away from the extraordinary growth of Michael Kors Holdings Ltd (NYSE:KORS), which is fueling its expansion entirely on operating cash flow, but I also know that many of the regions it’s operating in are weak from a consumer spending perspective. Back-to-school sales in the U.S. have been awful this year while austerity measures in Europe will cripple spending for years to come. Even Asia is showing signs of slowing, with China’s GDP growth backing off its historical average of 10%.

From a forward P/E basis, Michael Kors Holdings Ltd (NYSE:KORS) isn’t as expensive as it once was, but its growth rate just simply isn’t sustainable given the history of consumers’ buying habits.

Zillow Inc (NASDAQ:Z)
I honestly feel you could make this a 2-for-1 special and just lump rival Trulia Inc (NYSE:TRLA) in here as well, but Zillow Inc (NASDAQ:Z) is just a bit more unnerving from a valuation perspective and gets my short-sale suggestion nod over Trulia Inc (NYSE:TRLA).

The thesis against owning real estate information websites that provide tools to help prospective homebuyers and real estate agents locate homes for purchase or rent lies solely with the rising tide of interest rates. With the Federal Reserve hinting as early as May that it would soon be paring back its $85 billion monthly bond purchases, mortgage rates took off. In a span of a few months, 30-year mortgage rates spiked from below 3.5% to as high as 4.75%. By comparison, mortgage origination activity over that time fell in all but one week and is now more than 55% lower than at its peak in early May. In other words, higher mortgage rates have spoiled consumers and they’re much less likely to purchase a home if rates keep rising, which will ultimately hurt Zillow Inc (NASDAQ:Z)’s and Trulia Inc (NYSE:TRLA)’s bottom lines. These companies will benefit from a rental market perspective, but their bread-and-butter business is based on the homebuying hunt.

Up until now, growth hasn’t been an issue for Zillow Inc (NASDAQ:Z), with its record 69% revenue growth and a 66% year-over-year increase in membership in the second quarter. The concern is that Zillow still isn’t profitable thanks to pouring its cash flow into workforce expansion and website R&D. In fact, Zillow Inc (NASDAQ:Z) won’t be profitable until next year when the Fed will almost assuredly be ending QE3. For me, this exposes Zillow and its forward P/E in excess of 180 as exceptionally overvalued.

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