The following is a guest article by Adam Kommel and Joe Babler of Activist Shorts Research, which tracks activist short sellers. The article is excerpted from a clients-only quarterly report on activist short-selling. For more information go to www.activistshorts.com.
There has been considerable wailing and gnashing of teeth in the last few weeks over the state of short-selling. “Now, six years into a bull market run, with stocks in the United States smashing one record after another, these naysayers have all but lost their voice,” writes Alexandra Stevenson of the The New York Times in a piece called, “The Loneliness of the Short-Seller.”
Dan McCrum of the Financial Times, who has done a considerable amount of original reporting on activist short targets such as Quindell, Plus500, and Hanergy, among others, cites similar data and writes, “Dedicated short sellers are a rare breed which has become even rarer in the last five years.”
It may very well be a middling moment for short-sellers. Ackman’s massive short bet against Herbalife is in its third year and has, but for a few months, been a losing one. Jim Chanos is opening a new long fund and has seen Kynikos’ assets under management decline. Though the outperformers we track continue to outperform, the 104 campaigns we’ve identified so far in 2015 have only dropped an average 6.7% (so far).
Of course, the number of short-biased hedge funds McCrum and Stevenson reference is related to, but not synonymous with, the continued prowess of activist shortsellers more generally. Lest we forget, David Einhorn spent seven years and wrote a book before cashing in on his Allied Capital short.
The impression persists that short-sellers are simply a “short and distort” crowd, but as we’ve exhaustively documented, there’s no doubt that the best and most effective short-sellers do painstaking original research and maintain their theses through both ups and downs, sometimes for many years. Poor returns for a couple months in 2015 don’t change that undeniable trend.
Here is what we do know: the best short-sellers are still worth following. Since 2014, the median campaign saw a 15% decline. Fifty-five U.S. exchange-listed stocks saw a drop greater than 50%. There are still amazing opportunities. In the headlines, Lumber Liquidators, which has been in our database since we launched, fell almost 50% in anticipation of and immediately following the 60 Minutes report. Since then, it has fallen almost 50% again, demonstrating how good (and bad) stories take time to play out.
Beneath the headlines, The Friendly Bear targeted the then $1.5 billion TrueCar in March. We alerted you when it happened, and then highlighted the pick again a month later in our Spring Quarterly Report. With little attention from the financial press, that stock is now down almost 40%, falling below the billion dollar mark.
You might not join every new activist short campaign, but you certainly can’t afford to be long this class of underperforming picks. And if you’re advising one of these targeted companies, you don’t want to be the last to find out about it.
Activist short-sellers, this group of professional naysayers, are used to being on the outs. Nobody is as good as the best short-sellers at popping bubbles or telling the Emperor’s accounting department that its clothing expenditures are fictitious. We’d recommend against being too confident in naysaying these naysayers. Frankly, they’re probably better at it.