This post is about the most common reasons why I think short sellers decide to target a stock.
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Month: November 2013
Crocs: I guess I’m shorting this company now
I was wrong about John McCarvel. The way I judge a CEO’s operating ability is by looking at his or her prior track record. McCarvel had a run of a few very good years immediately after he became CEO in Feb 2010. In this situation, extrapolating from the past did not work. Currently, it seems like McCarvel was riding off of the momentum from the prior CEO (John Duerden) and is on track to slowly destroy Crocs. His decision to mislead investors with the share repurchase fakeout is bizarre and stupid. He is quickly destroying his credibility. And why exactly does he feel the need to mislead investors?
Guess the short thesis
Here’s an interesting exercise to sharpen your investment skills: go through the most heavily shorted companies and try to figure out what the short thesis is. Learning a little bit about what short sellers think can be very helpful as it hones your skills in detecting fraud (see my post on due diligence) and other problems at a company.
Do I recommend short selling common stock? No!
This blog has many short ideas involving shorting the common stock of a company. I don’t actually think that short selling common stock is a good idea. There are many ways to lose even if you’re right.
Sturm, Ruger (RGR): I’m betting against the short sellers
I think that short sellers are right most of the time. The most obvious shorts tend to have very high short interest and/or borrow costs. I try to avoid going long heavily shorted stocks because the short sellers probably know something that I don’t.
The borrow on RGR is a whopping 80.5% (on Nov 2 it was “only” 62%). If RGR was about to enter bankruptcy like ATPG or STP or CMEDY, I would understand the borrow being so expensive. But I seriously doubt that RGR is about to enter bankruptcy anytime soon. The company has been paying dividends since 2009. At the end of 2012, it issued a whopping $4.5 dividend (about 8.74% of its market cap at the time). Its products are real and are reviewed all over Youtube. I think that the shorts are wrong to pay such a high borrow for this stock. It is almost impossible to make money when the borrow is 80.5%.
Because the borrow is so expensive, the call options on RGR are trading at very low implied volatilities (mid 20s versus historical volatility of around 40).
NQ Mobile: Their actions don’t make sense for a legitimate company
Muddy Waters has accused NQ of being a fraud and falsifying its cash balances. NQ has waged a campaign to defend itself, issuing multiple press releases and holding a 2-hour conference call with investors. What doesn’t make sense is the steps that NQ is willing to go to “prove” that its cash is real. It has transferred a little over $100 million into its account at Standard Chartered Bank, giving up interest on its term deposits to do so. What kind of sane business manager would do this? At best, the CEO is an idiot for throwing away free money.
How would a sociopath fleece investors in mining?
As an investor, I don’t want to be on the wrong end of fraud. But I thought it would be interesting to look at things from a different perspective: what is the best way to commit fraud? What is the best way to fleece investors?
