IRPs Lead Way to European Shorting Success


The following article is provided courtesy of Edward Blad, Co – Head of London-based Marex Spectron Independent Research & CSA / Commission Management, specializing in introducing Independent Research to the buy-side.

European equity markets faced challenging headwinds throughout 2014 evidenced by a surge in volatility, an increase in the VIX, rising geopolitical risks as well as political risks closer to home. Despite these challenges, performance across markets was on the whole positive; the STOXX EURO 50 was up 4.9% in total Euro-dominated return terms and the STOXX EURO 600 was up 7.8%.

However, many active fund managers struggled to beat their benchmarks. A number of hedge fund managers were let down by their shorting strategies. Shorting is one of the most difficult skills for the buy-side to grasp, particularly in rising markets, as a positive beta stock market environment, such as 2014, will lift most shares whatever their fundamentals. This is what makes long / short strategies that can master their short exposure and beat the odds in the context of a positive market environment very appealing.

Historically it has been hard to find quality short ideas on European stocks, in part because investment banks rarely issue sells.  Fortunately, there are a growing number of Independent Research Providers that can support fund managers when looking for European shorting opportunities.

Such services are often based around trained chartered accountants who are able to scrutinise corporate disclosures in order to find anomalies in the published financial statements. Hedge fund managers typically do not have accounting backgrounds so can find partnering with forensic accounting and similar shorting specialist firms particularly rewarding.  Long only fund managers also have a use for such services to help identify accounting risk.

This article highlights five leading Independent Researchers that offer European short ideas and refers to a successful European call made by each throughout 2014.  The researchers are: Assay Research, CFRA, PN Finance, The Analyst and Voyant Advisors.

Assay Research, founded in 2003 by the former Director of Research and four senior analysts at CFRA. Assay is a US-based firm which uses predominantly forensic accounting methodologies to help investors find stocks to short. Each analyst is a CPA / CFA charter-holder covering specific sectors across Consumer, Retail, Healthcare, Industrial and TMT. The team aims to identify which companies are using aggressive accounting techniques to conceal any fundamental deterioration.

Swatch is a stock Assay Research had been writing on since April 2013 noting high levels of inventory with a deceleration in sales, weaker earnings quality from lower discretionary items, and a puzzling change in accounting standards switching from IFRS to Swiss GAAP. It was in 2014 that the Assay Swatch thesis began to play out as the stock fell 25% (CHF-denominated). The Assay analyst noted that the company’s overall DSI (days sales inventory) had increased by 18 days during the first half of 2014 which was the highest level in 3 years; this was whilst sales significantly decelerated to 2.4% versus 8.9% a year earlier.

CFRA, founded in 1994 with offices in New York and London, was the pioneering entity in the forensic accounting space. Today they have a team of over 20 analysts covering companies in North America, Europe and Asia and across multiple sectors.

Last year a particularly successful short was Petrofac, the UK-listed Energy corporate. CFRA first warned clients in May last year that 2014 consensus estimates were out of reach and that 2015 was likely to disappoint due to the margin risks associated with continued deterioration in working capital.  The company was added to their Biggest Concerns List later in May shortly before it issued a profit warning. The company issued another profit warning in November. CFRA’s research had highlighted: continuing increases in working capital, reflective of on-going project delays and execution issues; collection issues as management confirmed during its call; and concerns around the earnings risk associated with the IES (Integrated Energy Services) business from any production delays or project rephrasing. Petrofrac’s share price has fallen 50% since CFRA initiated coverage.

Paris-based PN Finance was founded by Paul Nagy, a former senior analyst at CFRA with consequent expertise in forensic accounting. He made some excellent short calls in 2014 including APR Energy, Indra Sistemas and most notably the technology company Quindell.

Paul wrote on Quindell in February 2014 and warned clients that the stock price valuation seemed very high relative to the cost of acquisitions. In addition, organic growth was not being included in management commentary, only reported growth, which was not adjusted for Quindell’s acquisition spree. Finally the cash investment in receivables increased materially largely due to accrued income. Paul frequently tried to speak to management about the issues he had identified but never received a response. It was two months after Paul’s research on Quindell that the ultra-mysterious Gotham City Research, a shorting-focused hedge fund seemingly similar to Muddy Waters, released a highly critical piece of research (almost 90 pages long) describing Quindell as Country Club built on Quicksand.  The company’s share price subsequently collapsed. Since Paul published his research the share price has fallen 80%.

London-based The Analyst was set up by Mark Hiley and Tom Whyman, two former Fidelity analysts. The team find high conviction long and short ideas mainly focusing on companies in Europe. When it comes to the shorting work, rather than focusing purely on accounting, they look for structural shorts through broken business models, management wrongdoing and competitive pressures. They ramped up their short recommendations last year given they were seeing an overvalued market, and made  a number of stellar calls including the UK supermarkets (Tesco – initiated in September 2013, and Sainsbury – August 2014), De La Rue (initiated in April 2014) and the most interesting, Let’s Gowex (initiated in April 2014).

Let’s Gowex was a Spanish-listed telecom services and wireless provider which filed for bankruptcy in July 2014 after the Chief Executive and Founder apologised to the markets for providing inaccurate financial reporting for the past four years.  This was another company that Gotham City Research had waded in to, but not before Mark Hiley initiated coverage on the stock.  He struggled to understand how and where the business made money.  Having reviewed the investor materials he found them highly promotional, particularly confusing and providing very little detail.  Part of the research process involved interviewing Let’s Gowex end users, all of whom had experienced poor service. Mark also tried the product himself but with very little success.

Voyant Advisors, founded in 2007 and based in San Diego, is made up of a team of 8 trained forensic accountants and CFA holders, who spend their time carrying out fundamental company-specific research in order to identify shorting opportunities. There are two separate products: the Domestic service focuses on US companies and the International service looks at non-US, mainly entities in Europe.

Voyant’s analysis noted at the beginning of last year that Adidas should be well placed to prosper from the World Cup which usually raises revenue by an average of 11%.  However, they were concerned with management’s estimates.  2013 had been a difficult year where there were multiple revenue guidance reductions yet the company still managed to report margin expansion by pulling revenues forward in its TaylorMade golf brand, reducing provisions for sales returns, allowances and warranties, and extending life of PP&E to reduce near-term depreciation expenses.  Voyant saw that TaylorMade was struggling to sustain growth and accelerated the launch of a new range of clubs, despite having launched a similar range only three quarters earlier.  Consequently, inventory increased 1,470 bps faster than peers and margins were put under severe pressure as the company engaged in promotional activity to sell excess inventory.  At the same time, the company continued to reduce provisions for returns while rival Nike was increasing allowances.  In July 2014 the company reduced its FY2014 revenue growth guidance.  Adidas’ share price has fallen 30% since Voyant’s initial report in January 2014.

As we head in to 2015, we eagerly await to see which corporate is next in the firing line for Gotham City Research. Hedge fund managers tuned in to high quality Independent Research Providers will be one step ahead in finding such shorting opportunities.

Marex Spectron is one of the world’s largest privately held brokers of financial instruments in the commodities sector and a leader in facilitating trade in physical energy products. It also offers broking services covering a broad range of financial products. Marex Spectron’s Independent Research & Commission Management business, working closely with the Cash Equities desk specialises in introducing high-quality IRPs to the buy-side and offering a facility to pay for such services through commissions / CSAs. As well as this introductory service, Marex Spectron manages research relationships including handling administrative aspects such as fee negotiations, invoicing, renewals and service T&Cs.  The team also analyses and reports on the regulatory environment and the changes affecting the research industry, particularly in light of the FCA’s / ESMA’s on-going review on dealing commissions.

If you would like information on any of the services mentioned above, please do get in touch with Edward Blad at Marex Spectron ( / +44 207 650 4486)


About Author

Sandy Bragg is a principal at Integrity Research Associates. He has over thirty years experience as an investment research professional. Prior to joining Integrity in 2006, he was an Executive Managing Director at Standard & Poors, managing S&P’s equity research business and fund information properties. Sandy has an MBA from New York University and BA from Williams College. Email:

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