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