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.

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.

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Pacific Sun (PSUN) – overvalued and losing money

PacSun is an apparel retailer that targets the fickle teen market.  I’m going to keep this post short and simple.  Since Gary Schoenfeld became CEO in June 2009, PacSun has been consistently losing money.  The CEO has had 3-4 years to turn the company around.  A good CEO would have turned around the company by now.  Of course, PacSun continues to report losses.  If the future resembles the past, then this company will continue to lose money and go bankrupt in a few years.  In YE2013, the company had GAAP losses of 77 cents/share versus a book value of 95 cents/share.  While the company has a lot of debt ($1.17/share at YE2013), the debt is probably not that dangerous as most of it matures in 2016 and (as far I can tell) doesn’t have financial covenants.

Market cap: $273M
Earnings yield: -22%
Price/book: 6.87
Short % of float: 15%
Short % of outstanding: 8.2%

*Disclosure:  Short PSUN common stock.