Short selling update July 2014

So far I have shorted the common shares of more than 80 stocks this year.  On common shares, I have been profitable overall despite a rising market.  Unfortunately, losses on put options (mainly YONG) have more than wiped out the gains on my common stock shorts.

I think that I’ve gotten fairly good at spotting bad stocks.  My CAPS account is a reflection of that.  (*CAPS does not consider the mechanics of borrowing shares.  It’s unrealistic.)  Unfortunately, I’ve been losing money on put options this year.  Part of this may be because I mainly short small cap stocks which are too illiquid to buy put options on.  As well, many of my shorts are volatile so the put options would be neither cheap or attractive.

2014-july-25-short-positions-02

See below for commentary on certain positions.  Keep in mind that due to the sheer number of positions, my research on short positions is typically very shallow.

Brief commentary on positions I like

Great Panther Silver (GPL):  This is a producing miner with not-so-great cash flow.  In the past four fiscal years, cash flow from operations minus capex has been negative.  IKN has some scathing commentary about the company.  The company may do well if commodity prices rebound.

Emerald Oil and Gas (EOX):  In 2013, there was 59 cents of SG&A for every dollar of revenue.  Cash flow from operations was barely positive or slightly negative in the past few years.  This is an oil and gas company that merged with Voyager Oil and Gas.  In 2008, Voyager paid $12k to secfilings.com for investor relations.    The excellent Bronte Capital blog has several posts that mention Voyager (here is one).

PRTS:  This is an online retailer of auto parts.  I’m not a huge fan of companies that compete against Amazon as I think that Amazon will dominate most areas of online commerce.  The company had GAAP losses for several years, had negative free cash flow for several years, and has a high P/B ratio (4.87).  Its cost of capital when selling debt has been high.  I expect this company to sell shares in a secondary offering- it makes sense for the company, the share price is high, and investment bank analysts are courting the company.

MATR:  This company IPOed during the tech bubble era.  The company does have a real product and real customers.  Unfortunately, the company has lost money in the last 9 out of 10 years.  Public markets have kept the company afloat.  The share count has roughly tripled over the last decade.  I’m shorting this company because it has a long track record of losing money.

NQ:  Muddy Waters and folks on Twitter have pretty much laid out the short thesis for this company.  The head of the audit committee stepped down for “personal reasons”; obviously the shorts think that the resignation did not happen for personal reasons.  The special investigation into the company (NQ press release) noted “indications that some information might be missing, and the Company’s management and staff were unable to provide a credible explanation for what the Investigation Team observed”.  The company still hasn’t filed its 20-F despite saying it would.  The company dismissed (fired) its auditor PwC (press release).  On the positive side… Professor Gillis of China Accounting Blog thinks highly of the new auditor Marcum Bernstein Pinchuk.

(EDIT: To clarify my opinion of Marcum Bernstein… let me put it this way.  If you gave me a basket of all the stocks that retain Marcum Bernstein for services, I would gladly short that basket of stocks if I didn’t have to worry about the mechanics of the borrow.  I do not think highly of Marcum Bernstein.)

While this stock has collapsed, I am still sticking around trying to squeeze out a little more profit.

PVCT:  Like NQ, I am still sticking around.  Adam Feuerstein of TheStreet.com has written some good articles on this company (here is one of them).  His Twttier @adamfeuerstein is worth following.  The company’s drug has weak patent protection.  In the off chance that the drug is effective, the profitability of the drug will be quite poor.

GSAT:  This is a satellite phone company that is branching out into satellite-based Wifi/Internet.  Historically, the economics of satellite phones has been awful.  The short thesis is that these losses will continue in the future.

AMTX:  This company is an “industrial biotechnology company producing renewable chemicals and fuels using patented microbes and processes“.  The company has had GAAP losses for the past decade and negative book value.  It has stayed alive because its share count has been steadily increasing.

GLRI:  This company’s AERO technology is designed for enhanced oil recovery of old oil wells.  The S-4/A filing provides information on revisions of proved developed reserves (page F-31):

  • As of Jan 1, 2012 there were 160 MMBls of reserves.  In the next year, revisions of previous estimates removed 127 MMBls (79%).
  • As of Dec 31, 2012 there were 103 MMBls of reserves.  In the next year, revisions of previous estimates removed 79 MMBls (77%).

The standardized measure of the company’s reserves as of December 31, 2013 was $561K or less than a million dollars.  In comparison, this company has a market cap of $262M.  So far it does not seem that this company has demonstrated financial success in creating value out of old oil wells.  In my opinion, they have mostly proven that their technology is mediocre and cannot support a public company with such a large market cap.

PSUN:  I covered this because I’m swing trading.  This may be a mistake as the operating business continues to lose money.  To management’s credit, the bleeding has been reduced significantly.

TXMD, GRH, IWSY:  I don’t have anything insightful to say about these new positions.

ATNM:  This pharma company pays for a lot of stock promotion.  The SG&A:R&D ratio is over 1:1.

Positions I don’t like

CBMG:  The 10-K is very, very interesting.  For example, the 10-K mentions that investor relations spending went up by over a million dollars.  However, I think that this is a dangerous short given the illiquidity.  Illiquid stocks are too easy to manipulate and can easily skyrocket on small amounts of buying.  I do not want to be like the short sellers who got burned on AAMC and CYNK.

YOD:  I covered my position and am no longer following this company.  The borrow is expensive and the market cap is only $46M (I prefer to short $100M+).

RH puts:  My ranking for this falls from tier 1 to 3 due to their convertible debt offering, which I previously explained.

COH puts:  I covered these.

KW (tier 5):  The cap rates on KW’s properties do not look attractive.  The actual cap rate is difficult to determine because one would have to determine what a normalized level of maintenance capex would be.  Nonetheless, I think that this company has below-average economics after paying insiders’ bloated salaries.  Fairfax Financial has constantly injected capital into KW via sweetheart deals.  After looking into this company, I have a low opinion of Prem Watsa.  I can’t see myself ever owning a share of Fairfax.  I do not think that KW is a compelling short given that it will likely sell shares repeatedly.

Links

Short selling update May 2014

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4 thoughts on “Short selling update July 2014

  1. Pingback: Beating Wall Street in oil and gas | Glenn Chan's Random Notes on Investing

  2. Pingback: Thoughts on oil and gas (Oct 2014) | Glenn Chan's Random Notes on Investing

  3. Pingback: Mining Shorts Roundup | Glenn Chan's Random Notes on Investing

  4. Pingback: My approach to diversified shorting | Glenn Chan's Random Notes on Investing

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