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.
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.
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).
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.
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?
Two years ago (see my post), I traded in and out of a weird security with the symbol GCVRZ (Genzyme contingent value rights). Today, the rights have fallen around 59% to $0.82 due to doubts over whether the FDA will approve Lemtrada, the drug whose commercial success will determine the payments on the contingent value rights (CVRs). The current price is below the price that I bought and sold these CVRs.
This is a small position for me that I bought puts yesterday (Nov 5). At the time, I did not realize that earnings was today. The implied volatility on CHK options is in the low 30s for the 2016 LEAPs and seems to be rather low. The historical volatility in the past 3 years was 40.97 according to Morningstar. I think that the stock is a little overvalued (see my CHK post) and that the put options are a little undervalued. This trade doesn’t have the greatest margin of safety.
