Tuesday, December 11, 2012
Short Framework Applied to The Scoreboard Inc
The Scoreboard Inc was a fad company that wrecked the nerves and the net worth of many short seller in 1991, 92, 93 and 94. The Scoreboard Inc repackaged baseball cards and sports memorabilia and sold its wares primarily on home shopping channels.
I. Short Sale Categories:
A company with a fad product.
II. Signs of Potential Short Candidates:
Key Document: Prospectus
1. One of the key officers had a civil claim against a baseballs star for physical assault.
2. The head guy, Goldin, had been chairman of the board of a company that had filed for bankruptcy in March 1990 with a personal default judgment against Goldin. His son and executive vice president received a suspended sentence and three years probation for unauthorized use of credit card accounts to gain access to a computer without payment when he was a student.
3. 33% of revenues were booked through a company owned by a son-in-law.
III Research the Short Candidates:
1. 1990 10K: AR up 142% vs Sales only up 76%. Finished good inventory up 82% vs CGS up only 60%. Prepaids were up 144%, 1.6 million against pretax income of $9.4 million. The only reason cash flow was positive was because of the increase in current liabilities.
2. 35% sales were to related party.
3. Q2 1992 finished goods inventory up 127% with AR up 130% and prepaids up to $7.2 million while sales and CGS were down.
IV.Important Points to Keep in Mind:
1. The accounting based analysis is not difficult to do but it takes time, patience, and a suspension of belief. The lack of attention by other professional investors to these financial details provides the inefficiency in information dissemination that is so central to the short seller's art. In Scoreboard Inc's case, balance sheet mess was key.
2. Even successful short sellers are consistently too early when they sell stocks, sometimes even years too early. In this case, it took almost 4 years.