Idea generation – potential short candidates (Zagg, Rite Aid, Zynga, Groupon, Herbalife, Overstock.com, SodaStream)

After closing the Green Mountain Short yesterday (final gain ~55%), I have only Kabel Deutschland left.

So of course I am looking for new short opportunities. As mentioned in an earlier post, the ideal short candidate should have most of the following “features”:

+ shady accounting
+ massive insider sales
+ negative free cashflows
+ pumped up growth through expensive acquisitions
+ expiring patents
+ hyped or “fad” based business model
+ very expensive valuation
+ high debt load and/or pension liabilities, operating leases etc.

Some of great sources for “shady accounting” or “accounting shenanigans” are specialised accounting blogs.

One of my favourite blogs is the fanatastic “Grumpy old Accountants” Blog. The writers, professors and assistent professors from US universities really produce superior forensic accounting analysis of US companies.

It is both, a great place to learn as well as to get some interesting short ideas.

Their latest analysis, which are all worth a read are about the following companies:

Zagg, which among other things inflates cashflow by accounting receivables as cash.

Rite Aid , the US drug store chain. I especially like the old post called “Rite Aid: Is management selling drugs or using them ?”

Groupon

Zynga

Personally, I think Zynga might be an interesting candidate if the Facebook IPO hype lifts their shareprice in the coming week.

Another interesting candidate they mention is Overstock.com, which is also a favourite of the initial Green Mountain critic Sam Antar at White Collar Fraud and J2 Global, a “cloud computing” company.

Another source for short ideas are of course famous hedge fund managers, most notable Jim Chanos and David Einhorn
For instance Herbalife. If David Einhorn himself is asking questions , you don’t want to bet against him.

Another “classic” is SodaStream, the company once called “the next Green Mountain”, when times were great then.

WARNING:

Many of those companies have already large short positions outstanding. Sodastream for instance has a Short interest to Free Float ratio of 58%, meaning that 58% of all freely available shares are sold short.

Another factor to watch closely is the relationship between outstanding short positions and trading volume. This measure is called “days to cover”. For an illiquid stock, even relatively low short interest percentages can lead to a long period of “days to cover” and therefore increase the risk of painful short squeezes

Let’s have a quick look at the stocks mentioned (sorted by SI / free float):

SI/Free float Days to cover
Herbalife 5.14% 4.9
Rite Aid 5.70% 3.5
Zynga 14.80% 3.5
Groupon 15.25% 4.8
Overstock.com 18.61% 26.2
J2 Global 24.43% 19.2
Zagg 44.66% 10.8
Sodastream 58.42% 10.8

Personally, I would hesitate to short anything above a 15%-20% percentage of SI/Free float although I have no “hard knowledge” to support this.

Summary: I do not have obvious short candidates yet, but I will try to enhance the watch list in order to act quickly if the opportunity comes up.

14 comments

  • Hallo Welju,

    danke für den sehr ausführlichen Kommentar.

    Eine Anmerkung: Der Post entstand im Juni 2011 auf der Basis der damals veröffentlichten vorläufigen Zahlen. Wie Du sicher weisst, musst Groupon seine Bilanzierung diverse male anpassen um dann im November 2011 erst zu IPOen.

    Ich habe mir ehrlich gesagt seitdem nicht die Mühe gemacht, nochmal den GB anzuschauen, ich weiß nur dass sie die geänderten Zahlen dann im April wieder rückwirkend ändern mussten.

    Das sind schon so viele “red flags” dass man auf der Long Seit als “value investor” damit seine Zeit nicht verschwenden sollte. Ob es für einen Short reicht, muss man in der Tat aber nochmal prüfen.

    MMI

    • Das mit den Anpassungen im IPO-Vorfeld wusste ich nicht. Vielleicht sollte ich neben dem Prospekt auch immer nach S-1-Veröffentlichungen schauen.

      Neben Shenanigans spricht gegen GRPN, dass sie über keine nachhaltigen Wettbewerbsvorteile verfügen und die Kundschaft (unternehmensseitig) recht häufig unzufrieden ist. Potente Konkurrenten ist ja bereits vorhanden. An WhaleShark Media (mit RetailMeNot.com) ist immerhin Google Ventures beteiligt.

  • Groupon…
    Unter https://valueandopportunity.com/2011/06/10/groupon-ipo-und-die-frage-was-ist-eigentlich-umsatz/ steht mit Bezug auf einen Artikel im Going Concern Blog:
    “Im Klartext heisst das, wenn also ein Kunde einen Groupon Deal abschliesst, der z.B. über 100 EUR geht und Groupon davon sagen wir 30% bekommt würde Groupon trotzdem 100 EUR als Umsatz buchen. Den Teil den Ebay oder Visa als Umsatz verbuchen würden, nennt man bei Groupon dann ‘Gross profit’.”

    Bislang vermag ich nicht zu erkennten, dass GRPN den gesamten Deal eines Kunden als eigenen Umsatz ausweist, und sowohl im Prospekt als auch im 10-K schreiben sie dazu: “The Company records the net amount it retains from the sale of Groupons after paying an agreed upon percentage of the purchase price to the featured merchant excluding any applicable taxes. Revenue is recorded on a net basis because the Company is acting as an agent of the merchant in the transaction.”

    Auch die Ansicht von Grumpy Old Accountants, dass der Posten Accrued merchant payable eigentlich zum Cashflow aus Finanzierungstätigkeit gehört, vermag mich nicht wirklich zu überzeugen. Traditionelle Accounts payables mögen anders ausschauen, traditionelle Finanzierungstätigkeiten aber nicht minder. Besser herausgestellt und erklärt werden sollte jener Posten allerdings schon.

    Seitens Grumpy Old Accountants heißt es, “the vendor payables […] represent advanced cash collections made by Groupon on behalf of merchants for whom Groupons have been sold”, was – sofern ich deren Geschäft richtig verstehe – bedeutet, dass GRPN die Zahlungen von Kunden erst dann an den Verkäufer weiterreicht, wenn die von Kunden erworbenen Gutscheine beim diesem eingelöst werden.

    Unabhängig davon mangelt es bei GPRN allerdings nicht an gewichtigen Fragezeichen.

  • Why HLF and not NUS?
    Both were discussed recently and I also wrote something on both. Also on CRM (accounting) and SaaS in general.

    • Welju,

      i haven’t had NUS on my radar, but thanks for mentioning it.

      Stupid question: Where did you write about CRM accounting ?

      MMI

      • w:o, Stocks for the Middle and Long Run, Nr.1011, Nr.1014, Nr.1339. See also Nr. 1381 and Nr.1419.

        With regard to their asset capitalization, it’s not a conservative approach but GAAP compliant.

  • I don’t know a statistic about short interest relative to free float – and maybe one has to be precise here – but I remember, that generally, a high short interest is a positive signal. Normally, the shorties got it right. But it may be, that these stocks are more volatile than others, which could make the short uncomfortable. So it might be indeed a good idea to stay in the upper half of your table.
    The link to Herbalife simply links to Whitecollarfraud. Is that intended?

    • Winter,

      the link was a mistake…have to correct it.

      I will definitively have to investigate the Short interest ratio further. Intuitively I want to stay away from “crowded” tardes.

      Somehow I am still traumatized by the Volkswagen short 😉

      MMI

  • Netsuite is clearly overvalued. The company just can not make anywhere enough money to justify the 3B market cap. Well, they are not even making money, they consistently lose it on fairly low level of sales, and the growth is just not enough to justify the huge market cap. 12 times sales !!!

    • Hi Gregory,

      thanks for the tip. Any indications of “accounitng shenaningans” at Netsuite as well ?

      MMI

      • The one reason that I do not immediately short NetSuite is Larry Ellison. The take over threat from ORCL/Ellison is too great. I do not know of any really obvious accounting nonsese, but the mathes just does not work in terms of being able to grow earnings to justify the market cap it has.

        • In this area (Software, cloud) one should never underestimate the “risk” of a large cash rich company hungry for growth. see HP and Autonomy.

          MMI

  • Hey MMI,
    i think CRM will be a high potential short candidate as well.

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