Short selling update May 2014

Lately, I’ve been organizing all my current and potential short positions into a table (see below).  The short positions I am most excited about go into Tier 1.

2014-may-20-short-positions-table-03

I’ve found it incredibly useful to start ranking my short ideas against each other and into tiers.  The short positions in the top tier generally have one or both of the following characteristics:

  1. There is a huge amount of fraud involved.
  2. The business will likely bleed a lot of cash in the future.

Ranking my ideas should help me short my best ideas instead of wasting margin on my second-rate and third-rate ideas.  However, I honestly don’t have the discipline to do this for my entire short portfolio.  I should probably cover my Imax and Pretium shorts because I think there are better shorts out there.

The usefulness of looking at portfolios

By looking at the table above, you should be able to get a sense of my abilities (or lack thereof!) as a short seller.  Perhaps you really understand a particular sector listed in the table above.  If so, you could form an opinion as to whether or not my rankings are sensible within that sector. You should be able to get a sense of some popular trades that I am not doing:

  • I don’t think that non-Chinese Web 2.0 is that bad.  I think that Facebook, Amazon, and Netflix are high quality companies with good/excellent management teams.  The level of fraud and scumbaggery is rather low compared to mining, oil and gas, pharma, and Chinese reverse mergers.
  • Generally no macro top-down bets, except against solar.
  • No bets against the Chinese economy (e.g. Caterpillar, steel, iron ore, etc.).
  • No bets against investment banks.
  • No pairs trading or attempts to hedge my longs.

I also believe that portfolios are an expression of a person’s personality and investing style.  You should see some paranoia about shorting common stock given the diversification.  My starting position sizes are usually around 0.2-1%.

My most important short positions

YONG puts

Rightly or wrongly, I have a massive position in this.  If YONG goes to 0 my portfolio will go up several times.  My position is currently down due to mark-to-market losses.  I don’t think that mark-to-market is relevant right now.  If the YONG merger closes, my puts will go to 0.  Otherwise, my puts will probably go up in value at least several times (that’s what happened when the merger failed the first time around).

I had no idea that I would be able to buy $7 2016 puts for 5 cents.  The theoretical maximum upside is 140X before commissions.  My average entry price is higher than 5 cents.

RH and GME puts

I have more money in GME puts than RH puts.  Ideally, it should be the other way around since RH is clearly more flawed than GME.

Brief commentary on some positions

NQ puts:  I covered my puts after the stock dropped on May 15.  The puts were really expensive (high implied volatility) when I bought them and still expensive when I sold them.  In general, I dislike expensive puts because it can be easy to lose money on the position if things don’t work out right away.  The puts went up around 4 times, though this was a very small position for me.

Homebuilders:  I covered CHCI because (A) the borrow became expensive and (B) I wanted to raise liquidity.  The other homebuilding shorts (KBH and HOV) were closed to free up margin for better short ideas.  Overall, I lost money shorting homebuilders.

CROX*:  Covered this position at a loss to short other stocks.

MY*, CGA*:  I’m waiting for these to rally before shorting them again.

SFXE*:  I have a feeling that many people don’t understand the true purpose of the CEO’s nominee agreements.  The writeup on VIC has a short thesis with an overview of the business’ economics.  I have no position at the moment.

TPLM:  The older 10-Ks have some details on this company paying for stock promotion.  Pinkinvesting.com summarizes some of their promoters.

Promotional stocks:  I’m pretty comfortable with this category.  Some of the stocks in this category have awful cash flow and are paying for stock promotion.

Pharma:  Pharma is NOT within my circle of competence.  For example, I did a writeup on HART.  I only found out later that both the parent (HBIO) and the spinoff (HART) both turned into highly promotional stocks.

So why am I shorting pharma?  It’s because the level of paid stock promotion, excessive G&A and the valuations are rather high.

JOE, CRM, POT, GA puts:  Knowing what I know now, I probably would not have put on these illiquid positions.

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8 thoughts on “Short selling update May 2014

  1. I think OMEX is a risky short because Meson has made a lot of misleading and hyperbolic claims in an effort to push the stock down. I doubt OMEX will ever earn decent returns, but in the short run a lot of Meson’s claims may fail a la The Boy Who Cried Wolf, and there’s a real risk of a short squeeze.

    I’m surprised that PVG and NG are only fourth-tier if you think their flagship projects are uneconomic. Is that just a matter of tiers 1-3 being even worse?

    I’d be interested to hear your thoughts on MPET, since it’s the subject of a recent and highly-rated VIC writeup. I don’t have access to the writeup as a guest (it came out only a month ago), but it shows up at the top of the “Highest Overall Rated” list.

    • Graham Farquharson might be right when he said that Pretium’s VOK deposit has excellent chances of turning into a mine. I did not say that their deposit was uneconomic.
      NG has a big pile of cash. Their deposit may have some option value if gold prices are much higher than today.

      MPET: Read my post on microcaps and G&A, and my approach to shorting oil and gas, and to a lesser degree how would sociopaths fleece investors in oil and gas. They largely explain my framework behind these oil and gas stocks. Because MPET has a low market cap, analyzing their G&A spending should really pay off.
      See my post on shorting VIC. Collectively VIC’s track record when it comes to resource stocks has been poor. They’re on the wrong side of many resource stocks (ATPG, Yukon Nevada, Goldgroup, Baja Mining, etc.).

      All short positions have a risk of a short squeeze… including freaky stuff like Volkswagen, CMEDY, Goldman screwing Copper River, etc. etc. I keep my position sizing down. Hopefully it is low enough that I don’t blow up.

  2. Thanks for the reply. I see what you mean about MPET’s g&a.

    With PVG, I must have been reading my own assumptions into your post– at one point you said they would probably have to use selective mining, and I assumed that would kill the project’s NPV.

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