Company Description: Integrated Resources was a marginal company ( a company has shaky financials, bad management and a history of aggressive but often poorly executed business strategies) that derives its revenue from 3 areas: Life insurance companies, Direct Participation Investment Programs, and Money Management.
I. Short Sale Categories and Characteristics (There are some overlap):
1. Integrated Resources could be affected in a significant way by changing external events, in this case, the Tax Reform Act of 1986.
2.Greedy and shoddy management:
i. Executives were related-brothers.
ii. Executives earned over 15 million when the company earned 49.8 million in 1986.
iii.The company even paid medical cost not covered by insurance policies.
iv. Creative stock bonus incentive plan: When granted stock option, they paid 5% in cash and the remaining balance in installment over the vesting period.
3. Ugly balance sheet and Accounting Gimmickry:
i. Equity as a % of assets dropped from 20% to 10% (1986 10K). Eroding equity capital affects bargaining and credit standing in the market.
ii. Integrated booked revenues from future rental proceeds and proceeds realized on sale of property up front when it closed the partnership. These are booked in deferred fees and contract rights.
iii. Prepaid and acquisition cost up more than 100% with no explanation.
4. Shift in business strategy: In 1987, Integrated decided to change the product emphasis to income-producing partnerships, variable annuities and money management.
II Research the Short Candidates and Track Operating Metrics:
1. Q1 1987 income from operations down and cash flow continued to deteriorate.
2. Q3 cash burn was ameliorated by long term debt and short term debt financing. Shareholder's equity as a % of asset is down to 8.6%.
3. 1987 10K had a particular interesting footnote: A change in amortization of prepaid acquisition costs in the 4th quarter added $0.97 to earnings. The change was not booked as an extraordinary item.
4. Also booked a gain from termination of a pension plan.
5.Q1 1988: Pretax income was down, interest expense was up. The company will continue to require additional funds from sources other than operations. AP was up 270 million to 426 million in just 3 months. Drexel Burnman Lampert helped Integrated Resources with 100 million senior notes.
6. Integrated resources owned 2 insurance companies: Integrated Resources Life and Capitol Life. The insurance subs, in turn, owned a fair amount of Integrated and Integrated affiliate paperstocks, bonds and notes.
7. Integrated Resources Life had a surplus of only 77.3 million with 3.086 billion assets.
8. Capitol Life had surplus of 61 million against asset of 1.9 billion.
9.Q3 1988: Earnings down again, equity as % of asset down to 7.1%.
10. Insider were selling in Dec 1988.
11. On May 16, 1989, Integrated announced that first-quarter results would be late and that there would be a net loss after a preferred dividends.
12. Around June 1989, the company admitted that cash was a problem and Drexel balked. The stock dived to 5 and Integrated filed for bankruptcy in early 1990.
III.Important Points to Keep in Mind:
1. The short maxim: Wait to short until reality can be proved.
2. Short sellers are often shortsighted about the duration of hope for a new industry and for concomitant stock-price decreases. Stock price parabolas can sometimes appear to bend back on themselves, but the rate of return on the short position might look like net income on a company in the interim.
Friday, December 14, 2012
Tuesday, December 11, 2012
Applying Short Framework to J. Bildner & Sons and Jiffy Lube
J. Bildner was an upscale yuppie grocery store chain that went public in the fall of 1986. It claims to serve time-conscious consumers with high levels of disposable income. In other words, a big 7-eleven with great service and home delivery for i-bankers and the like. The store featured imported tile, marble, European refrigerated cases, antique fixtures, and mahogany paneling and offered everything from video rentals to Brie to Pampers.
I. Short Sale Categories and Characteristics
1.IPO stock with a franchise mania.
2.Young and inexperienced managers.
3.Flawed business plan: Atlanta and Birmingham did not suit the business plan. People in the South behave differently from the North. No one is going to drive to a mall after work and fight crowded parking lots for pricey carryout, and return home in rush hour traffic to eat in.
II Research the Short Candidates:
1. The quality of earnings was poor. Other expense went down from 280,339 to 34,781. It turned out that the company used a one-time gain of one of the company's store to offset operating expenses.
2. Construction delays hurt the expansion plans and the company required more financing than originally anticipated.
3. Cash burn was quicker than anticipated.
4. Prepaids and other assets were rising. Aggressive capitalizing pre-operating expenses.
5. The company is not meeting is strategic plan by a large margin. It only opened 23 stores compared to the originally planned 50.
6. Closing of the New York stores with sales price lower than cost.
Jiffy Lube, a quick oil change franchise company, was a growth stock and a short sale candidate with plenty of Wall Street assistance in blowing up the balloon. It was great franchise training, with a classic set of franchise financial statements for short sellers who fought the restaurant rage in the 1990s.
I. Short Sale Categories and Characteristics
6. The company also held 31 centers for resale.
7. SEC disagreed with the recognition of area-development fees.
8. The company purchase a new headquarter for $10,500,000.
1988:
1. Acquisition rumor, stock spiked but the rumor failed to materialize.
2. Centers for resale were up to 70.
3. Debt kept going up.
4. Credit loss provision increased.
5 Franchisee backed assets escalated from approximately 45% to 79% of total assets.
6. If a company quits adding new franchisees, earnings and revenue growth halt. If a parent subsidizes all the growth of new stores, slow payments can kill already tenuous cash flow.
I. Short Sale Categories and Characteristics
1.IPO stock with a franchise mania.
2.Young and inexperienced managers.
3.Flawed business plan: Atlanta and Birmingham did not suit the business plan. People in the South behave differently from the North. No one is going to drive to a mall after work and fight crowded parking lots for pricey carryout, and return home in rush hour traffic to eat in.
II Research the Short Candidates:
1. The quality of earnings was poor. Other expense went down from 280,339 to 34,781. It turned out that the company used a one-time gain of one of the company's store to offset operating expenses.
2. Construction delays hurt the expansion plans and the company required more financing than originally anticipated.
3. Cash burn was quicker than anticipated.
4. Prepaids and other assets were rising. Aggressive capitalizing pre-operating expenses.
5. The company is not meeting is strategic plan by a large margin. It only opened 23 stores compared to the originally planned 50.
6. Closing of the New York stores with sales price lower than cost.
Jiffy Lube, a quick oil change franchise company, was a growth stock and a short sale candidate with plenty of Wall Street assistance in blowing up the balloon. It was great franchise training, with a classic set of franchise financial statements for short sellers who fought the restaurant rage in the 1990s.
I. Short Sale Categories and Characteristics
1.Poorly devised business plan: The company bet that a spectacular growth rate of franchises would swamp all competition and leave it in control of the field.
2. New concept with no barrier to entry. (oil change, how hard is that).
3. Jiffy Lube took debt for franchisee start-up expenses and they delivered inventories of oil and parts for credit. It is not normal for franchisor to assume all of the risk of many of the franchisees.
II Research the Short Candidates and Key Development:
1986: Prospectus
1. The Company requires substantial amount of capital to provide for the acquisition and development of centers.
2. Competition was mounting.
3. The stock was selling at 40 times next year's earnings.
4. Operating income was full of nonrecurring items such as gains on the sale of real estate and Company Operated Centers.
5. Management has routinely facilitated the Company's funding of various projects by either loaning money directly to the Company or personally guaranteeing loans from others.
6. Conflicts of interest: Certain members of management are investors in area developments and franchises.
1987:
1. Related party transaction. CEO and chairman of the Company through a partnership which he started with 4 other partners, increased Jiffy Lube's revenue and cash.
2. Non recurring earnings were greater than GAAP earnings.
3. High AR, average store sales dropping, too much credit to franchises (no moeny down for owners/operators).
4. Burning cash, but still announced a stock repurchase plan.
5. Debt is up.
6. The company also held 31 centers for resale.
7. SEC disagreed with the recognition of area-development fees.
8. The company purchase a new headquarter for $10,500,000.
1988:
1. Acquisition rumor, stock spiked but the rumor failed to materialize.
2. Centers for resale were up to 70.
3. Debt kept going up.
4. Credit loss provision increased.
5 Franchisee backed assets escalated from approximately 45% to 79% of total assets.
6. If a company quits adding new franchisees, earnings and revenue growth halt. If a parent subsidizes all the growth of new stores, slow payments can kill already tenuous cash flow.
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.
Sunday, December 9, 2012
Applying Short Sale Framework to Happiness Epxress
Company Description:
Happiness express sells toys and its product is Mighty Morphin Power Rangers.
I. Short Sale Categories:
Companies that will be affected in a significant way by changing external events. In Happiness Express's case, the fad of its Mighty Morphin Power Rangers has peaked.
II. Signs of Potential Short Candidates:
1. Depending on 1 product Mighty Morphin Power Rangers.
2. Previous sales before Mighty Morphin Power Rangers also concentrated in few products, the licenses of some of which were nonexclusive.
3. Insiders were selling.
4. Cash was burning.
III Research the Short Candidates:
1. Off-Balance sheet purchase agreement of $2 million and minimum executive compensation of $900,000.
2. Inventory soared.
3. Cash kept burning.
NOTE: Valuation, did not signal a safe and secure short. This is, in fact a value trap back in 1995. Earnings for the March 1995 fiscal year were expected to be $1.10, up almost 50% from the previous year, with at least another 50% rise expected for fiscal 1996. That meant the stock was selling at less than 9 times forwarding earnings. It took a year and a half before the stock plummeted.
Applying Short Sale Framework to Medstone International Inc (1988-1990)
Company Description: Medstone International was a lithotripsy company that makes machines for noninvasive disintegration of kidney stones. In layman's term, this company's product crushes kidney stones.
Key Document: IPO Prospectus.
I. Short Sale Categories:
Medstone has a tremendously inflated stock price that suggests a speculative bubble in a company's valuation.
Medstone will be affected in a significant way by changing external events.
Supporting Facts from prospectus:
1. The product was not patented.
2. The competition was large and international with a significant installed base.
3. Limited operating history, deficit net worth, working capital deficit.
4. Dependence on two key executives.
5. Only one product.
6. Some of the offering money went to senior officers to pay for prior services.
II. Signs of Potential Short Candidates:
1. The stock was trading at $40 between Q2 and Q3 of 1988 because the doctors are promoting the stock extensively. Doctors are reputed to be the marginal suckers on new drugs or medical-products companies for aggressive retail brokers. The doctors promote the stocks to peers and friends and enthusiastically inflate the market value, especially if the product is remotely associated with their area of expertise.
2. Founder and president Richard Penfill sold 100,000 shares of stock in September 1988 before the deadline elapsed.
3. Chairman of the board resigned in December.
III Research the Short Candidates:
What's driving the hype?
1. Q3 1988 was strong, EPS $0.52 per share vs $0.18 estimates. Sales doubled.
2. One analyst estimated earnings of $4.40 in 1989, up from $0.33 in 1987. $4.40 implies only 6 times P/E for a company that's growing fast with the group trading at 15 to 20 times earnings.
3. Signed an agreement with GE and GE will sell Medstone's machine in Europe and Middle east, providing parts, installation, and maintenance.
Reality Check from 10K 1988 and 10Q 1989.
1. Sales to a single shareholder and his affiliated companies made up 13% of the 1988 and 1987 revenues. The shareholder loaned Medstone $75,000 back in 1984. In connection with his first machine purchase in 1987, he had the right to buy another machine at 80% of the price and received $86,500 in consulting fees from Medstone in 1985 and an additional $123,000 from the offering.
2. 2Q 10Q showed inventory soared from $385,000 in June 1988 to $5.5 million in June 1989.
3. 2Q 1989 sales were donw.
4. Founder and president resigned in August 1989 and the company reported noncompliance issues.
5. Competitor check: Dornier Company, whose product is patented and have the most installed base of 250 machines. Medstone has only placed 9 machines selling $1 million each.
Bucking The Trend-Some Thoughts on Apple
Claim: This is an article I wrote back in September. I saved it but forgot to publish. Apple's stock has dropped more than 20% since then, which I think is reasonable. I don't think Apple is expensive at $538 and 12 times earnings.
Apple has revealed iPhone 5 today, with no surprises. As expected, the new phone is taller, thinner and lighter than the iPhone 4S. It has a four-inch display, enhanced picture resolution and a longer battery life. Its processor and graphics are twice as fast as the iPhone 4S, uses iOS 6 and can run on LTE networks.
The question is, will it live up to the hype? How many people will either switch to iPhone 5 or upgrade to iPhone 5? iPhones accounted for 43% of Apple's total sales last year and, according to Sanford C. Bernstein & Co., 70% of Apple's profits. The performance of iPhone 5 is obviously very important to Apple for the next year or so.
So far, Wall Street seems to think the iPhone 5 will live up to the hype. Wall street is still bullish on Apple. It's not uncommon to see a $1000 price target for Apple's stock from a Wall Street analyst. Some of the best fund managers, including David Einhorn, are stating that Apple's stock is still undervalued by a considerable amount. The bulls claim that Apple is the most innovative company in the world and people have to keep upgrading their Apple product every year or every 2 years. The Chinese market still has a lot room for Apple to grow. Apple is widely misunderstood, it's not a hardware company, it's a software company that monetizes value through the repeated sales of high-margin software. Apple could hit 1 trillion market cap. With 932 million shares outstanding, that implies a per share price of over $1000. Let's say Apple's current P/E is indeed too low at 16 time earnings and let's bump it up to 18 times. A $1000 price target would therefore implies an earnings per share of roughly $56, a more than 30% increase from today's earnings per share. So far, this all sounds very reasonably achievable for Apple. Better yet, you'll also get about 25% of the earnings as dividend, which you can either reinvest or keep as cash.
Let's take a look at the 2 most prominent bull's claims .
Claim one: Apple is the most innovative company in the world and people have to keep upgrading their Apple product every year.
Possible counterclaim: Apple was the most innovative company in the world when Steve Jobs was still alive. He has passed away for a little over a year and it's reasonably obvious that Apple's product has not been as innovative as before. Apple's humongous run for the past couple of years are based on some great visionary products that were basically invented by Steve Jobs and the historical success of Apple, to a large extent, is also based on the visions by Steve Jobs. Tim Cook is not even close to Steve Jobs in terms of innovative and visionary thinking. iPhone 4s is a lot like iPhone 4 and the New iPad is very similar to iPad 2, now the so called iPhone 5 seems to me a slightly upgraded iPhone 4s. It will be very hard, if not impossible for Apple to come up with products as revolutionary as the first generation of iPhone and iPad again without Jobs.
Claim Two:The Chinese market still has a lot room for Apple to grow.
Possible counterclaim: People who have been to China know that you don't buy Apple's product from an Apple store, there are retailers all over the place who sells Apple's product. In a electronic market where hundreds of small electronic shops operate, over half of them sell iPhone and iPad. My point is do not extrapolate Apple's growth in China based on the number of Apple stores in China. It is extremely easy to buy an iPhone already and adding Apple stores is more like a marketing tool. Plus, people who can afford iPhone has already bought an iPhone, or even two iPhones when the iPhone is considered unique. Now that iPhone is a "street phone", I've seen a lot of people switching to Samsung and Nokia.
If history rhymes, as it always has, in my humble opinion, at the current price, Apple is not offering a large enough margin of safety for a conservative value investor. Please do not get me wrong, I am not bearish on Apple. I am just saying it looks to me that Apple is not very undervalued, especially if you are very long-term oriented.
Apple has revealed iPhone 5 today, with no surprises. As expected, the new phone is taller, thinner and lighter than the iPhone 4S. It has a four-inch display, enhanced picture resolution and a longer battery life. Its processor and graphics are twice as fast as the iPhone 4S, uses iOS 6 and can run on LTE networks.
The question is, will it live up to the hype? How many people will either switch to iPhone 5 or upgrade to iPhone 5? iPhones accounted for 43% of Apple's total sales last year and, according to Sanford C. Bernstein & Co., 70% of Apple's profits. The performance of iPhone 5 is obviously very important to Apple for the next year or so.
So far, Wall Street seems to think the iPhone 5 will live up to the hype. Wall street is still bullish on Apple. It's not uncommon to see a $1000 price target for Apple's stock from a Wall Street analyst. Some of the best fund managers, including David Einhorn, are stating that Apple's stock is still undervalued by a considerable amount. The bulls claim that Apple is the most innovative company in the world and people have to keep upgrading their Apple product every year or every 2 years. The Chinese market still has a lot room for Apple to grow. Apple is widely misunderstood, it's not a hardware company, it's a software company that monetizes value through the repeated sales of high-margin software. Apple could hit 1 trillion market cap. With 932 million shares outstanding, that implies a per share price of over $1000. Let's say Apple's current P/E is indeed too low at 16 time earnings and let's bump it up to 18 times. A $1000 price target would therefore implies an earnings per share of roughly $56, a more than 30% increase from today's earnings per share. So far, this all sounds very reasonably achievable for Apple. Better yet, you'll also get about 25% of the earnings as dividend, which you can either reinvest or keep as cash.
Let's take a look at the 2 most prominent bull's claims .
Claim one: Apple is the most innovative company in the world and people have to keep upgrading their Apple product every year.
Possible counterclaim: Apple was the most innovative company in the world when Steve Jobs was still alive. He has passed away for a little over a year and it's reasonably obvious that Apple's product has not been as innovative as before. Apple's humongous run for the past couple of years are based on some great visionary products that were basically invented by Steve Jobs and the historical success of Apple, to a large extent, is also based on the visions by Steve Jobs. Tim Cook is not even close to Steve Jobs in terms of innovative and visionary thinking. iPhone 4s is a lot like iPhone 4 and the New iPad is very similar to iPad 2, now the so called iPhone 5 seems to me a slightly upgraded iPhone 4s. It will be very hard, if not impossible for Apple to come up with products as revolutionary as the first generation of iPhone and iPad again without Jobs.
Claim Two:The Chinese market still has a lot room for Apple to grow.
Possible counterclaim: People who have been to China know that you don't buy Apple's product from an Apple store, there are retailers all over the place who sells Apple's product. In a electronic market where hundreds of small electronic shops operate, over half of them sell iPhone and iPad. My point is do not extrapolate Apple's growth in China based on the number of Apple stores in China. It is extremely easy to buy an iPhone already and adding Apple stores is more like a marketing tool. Plus, people who can afford iPhone has already bought an iPhone, or even two iPhones when the iPhone is considered unique. Now that iPhone is a "street phone", I've seen a lot of people switching to Samsung and Nokia.
If history rhymes, as it always has, in my humble opinion, at the current price, Apple is not offering a large enough margin of safety for a conservative value investor. Please do not get me wrong, I am not bearish on Apple. I am just saying it looks to me that Apple is not very undervalued, especially if you are very long-term oriented.
Value-Oriented Short Sale Framework
This framework is based on the book "The Art of Short Selling" by Kathryn Staley.
I. Short Sale Categories and Characteristics (There are some overlap):
1. Companies in which management lies to investors and obscures events that will affect earnings.
2. Companies that have tremendously inflated stock prices-prices that suggest a speculative bubble in a company's valuation.
3. Companies that will be affected in a significant way by changing external events.
4. New Concept stocks that draw a lot of attention and hypes. Fad or bubble stock pricing: usually marked by a stellar price rise over a short period.
5. Accounting gimmickry: clues that the financial statements do not reflect the true state of corporate health.
6. Insider sleaze:signs that insiders consider the company a personal bank or think the stock should be sold.
7. A gluttonous corporate appetite for cash.
8. Overvalued assets or an ugly balance sheet.
9. Concepts stocks with no or low barrier to entry. (Groupon for example)
10.IPOs of stocks in hot industry that is overhyped and has a lot of competition. (similar to 4)
II Research the Short Candidates:
1. Work from at least 2 years of 10Qs and 10ks and analyze balance sheet, cash flow and financial ratios.
2. Track insider activity and management's compensation vs company's performance.
3. Look at the products, the competitors, the suppliers of production inputs.
4. Read analyst reports and determine consensus.
5. Read and keep up with the news of the company over time to see what happens, how earnings and price progress, what changes.
6. Clear catalyst that will send the company's stock downtown.
7. Keep track of key metrics that indicate trouble such as AR, Inventory, Prepaids and compare them to sales and CGS and operating income.
III.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.
2. Even successful short sellers are consistently too early when they sell stocks, sometimes even years too early. David Einhorn's Allied Capital, Bill Ackman's MBIA, Witney Tilson's Netflex.
3. Short seller fear most a sustained rally in a stock followed by a forced buy-in of their position, resulting in a loss out of their control, particularly in companies with smaller floats.
4. Valuation bets on price alone make bad short sales, i.e shorting a stock just because you think the stock is overvalued may be dangerous. There must be either a fundamental change in the outlook for the company or a major misconception by the stock-buying public.
5. You have to be able to articulate in clear logic what mechanics will impact the income statement and balance sheet negatively. The best way may be talking to competitors and suppliers. The point of short is when those mechanics become overwhelmingly apparent and the stock is still up.
6. Jim Chanos use return on invested capital calculated by EBIT/(All Interest Bearing Liabilities+Equity+Deferred Taxes+Short Term Debt).
7. High ROE makes for a lousy short sale because the company can finance its growth without caring a fig what the Wall Street Pubahs think about the business plan.
8. When a company switches or expands its business line into something completely different, it generally means management fears that growth will slow in the main line. When they expand into a highly competitive business that costs money for product development (like software game titles) when the base business eat money as well, you sit back and watch with relish for the train wreck to happen sooner.
I. Short Sale Categories and Characteristics (There are some overlap):
1. Companies in which management lies to investors and obscures events that will affect earnings.
2. Companies that have tremendously inflated stock prices-prices that suggest a speculative bubble in a company's valuation.
3. Companies that will be affected in a significant way by changing external events.
4. New Concept stocks that draw a lot of attention and hypes. Fad or bubble stock pricing: usually marked by a stellar price rise over a short period.
5. Accounting gimmickry: clues that the financial statements do not reflect the true state of corporate health.
6. Insider sleaze:signs that insiders consider the company a personal bank or think the stock should be sold.
7. A gluttonous corporate appetite for cash.
8. Overvalued assets or an ugly balance sheet.
9. Concepts stocks with no or low barrier to entry. (Groupon for example)
10.IPOs of stocks in hot industry that is overhyped and has a lot of competition. (similar to 4)
II Research the Short Candidates:
1. Work from at least 2 years of 10Qs and 10ks and analyze balance sheet, cash flow and financial ratios.
2. Track insider activity and management's compensation vs company's performance.
3. Look at the products, the competitors, the suppliers of production inputs.
4. Read analyst reports and determine consensus.
5. Read and keep up with the news of the company over time to see what happens, how earnings and price progress, what changes.
6. Clear catalyst that will send the company's stock downtown.
7. Keep track of key metrics that indicate trouble such as AR, Inventory, Prepaids and compare them to sales and CGS and operating income.
III.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.
2. Even successful short sellers are consistently too early when they sell stocks, sometimes even years too early. David Einhorn's Allied Capital, Bill Ackman's MBIA, Witney Tilson's Netflex.
3. Short seller fear most a sustained rally in a stock followed by a forced buy-in of their position, resulting in a loss out of their control, particularly in companies with smaller floats.
4. Valuation bets on price alone make bad short sales, i.e shorting a stock just because you think the stock is overvalued may be dangerous. There must be either a fundamental change in the outlook for the company or a major misconception by the stock-buying public.
5. You have to be able to articulate in clear logic what mechanics will impact the income statement and balance sheet negatively. The best way may be talking to competitors and suppliers. The point of short is when those mechanics become overwhelmingly apparent and the stock is still up.
6. Jim Chanos use return on invested capital calculated by EBIT/(All Interest Bearing Liabilities+Equity+Deferred Taxes+Short Term Debt).
7. High ROE makes for a lousy short sale because the company can finance its growth without caring a fig what the Wall Street Pubahs think about the business plan.
8. When a company switches or expands its business line into something completely different, it generally means management fears that growth will slow in the main line. When they expand into a highly competitive business that costs money for product development (like software game titles) when the base business eat money as well, you sit back and watch with relish for the train wreck to happen sooner.
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