mercredi 7 septembre 2016

Bet against a good business (another way to find attractive stocks part II)

How come some investors dare to short great stocks? A business may face some challenges and a drop in earnings, but when that business has been solid in the past, I don't understand why people may bet against it (I wrote about that subject, 6 months ago). 

There's plenty of bad business out there. Why not bet against them? Why choose a business with great numbers, great ROE and great appreciation over time and not one of those stocks with a PE ratio of 80 or without any earnings since 2012?

You can find that kind of crap easily if you screen the market.

I discovered that my portfolio has a lot of heavily shorted stocks. I don't understand why so many people short them. Can you really short a business like Polaris, with an historic ROE higher than 99% of all the stocks on the market?  And how the fuck Netflix and Valeant are less shorted than Lithia Motors and Carmax? (Well, actually, Valeant is slightly more shorted than Lithia Motors).

Anyway, here's some stocks I like / I own that are heavily shorted (percentage = % of float shorted)

Lithia Motors (12%)
Carmax (16%)
Bank of the Ozarks (19%)
Chipotle Mexican Grill (20%) not so sure I like this one, but I don't dislike it either
United Therapeutics (23%)
Polaris (23%)

And here's some stocks I dislike that are heavily shorted (I'd short them if I had to short something)

Netflix (8%)
Valeant (13%)
David's Tea (27%)
Tesla Motors (30%)
Sears Holdings (63%)

Compare the two lists. You'll be amazed to see that a very high quality bank like Bank of the Ozarks is being more shorted than Valeant. Or that a business like David's Tea (that doesn't have earnings) is almost equally shorted as Polaris which is very very profitable.

Maybe you could take advantage of that folly.

5 commentaires:

  1. When you own a stock, you MUST know why other people are shorting this same stock. It's easy to find out. Go on stock and ask. They will tell you. If you do not have the argument from the other side, you should not own your stock. You need to do your homework on a deeper level.

    For example, I recently purchased Smith & Wesson just before earnings. The numbers were phenomenal. The stock proceeded to go down with great sales and earnings increases and upwards revision of future earnings. 17% of Smith & Wesson stock is shorted. I now know why. The shorts argue that this is a CYCLICAL STOCK. That sales will not always be this high. They also argue that the stock has gone up a lot in the last 12 months. I understand their opinion.

    As a general rule, it's a bad idea to short stocks. You could have gone bankrupt many times over by shorting names like Amazon that almost never make a profit (or tesla and netflix with ridiculously high p/e ratios). The market can stay irrational far longer than I can remain solvent.

    Also consider the handicap for the short side. If the stock market averages 10% per year...then that's a handicap for the short side. If the stock they borrow to short has a dividend, they must pay that dividend.

    If you short, you would prefer to short really bad companies, right? But really bad companies are going for very little ALREADY. Westmoreland Coal was going for $6 in January (a Francis Chou pick). You would be down over 50% if you shorted it at the beginning of the year. It was already beat up.


    It may be interesting to hear Steve Belisle discuss why he is avoiding this sector.

    1. With a PE ratio of 7-8 for such a performing business, it's obvious that it's a cyclical stock.

      But, if you take a look at the earnings for the last 5 years, you'll be surprised to see how consistent they were.

  3. I will comment on KMX since this is one of my position.

    The short interest is so high because the shorts could be right. Car sales can go down very fast if the economy is shrinking.

    So why I am holding ? I have no idea when that will happen. Maybe in this year, maybe next , maybe in 5 years ? In that case it could up 100% before it go down.

    One more thing, I would never, never bet against someone like Elon Musk. He's been underestimated all his like and still he accomplishing many feats to nobody tough he could do.

    1. My point is probably that you should short a bad business or a very overvalued business instead of a cyclical business.