Monthly Archives: May 2012

SIAS SpA stock tanking – what to do ?

Posted on by 5 comments

At the moment, my portfolio position SIAS is tanking like crazy. Interstingly much more than Autostrada:

The reason seems to be quite obvious: People are worried that Gavio will use SIAS to fund further Impregilo Purchases.

Interestingly, there seems to be now an activist Investor on board who has voiced this concern publicly, Italian version here.

He is basically demanding that Gavio publicly announces not to use SIAS (and the cash proceeds from the South America sale) to fund further Impregilo purchases.

The current share price however speaks a different language. So what to do now ? In the case of Autostrada, it had paid to sell first and ask questions later.

In this case howver, I am currently inclined to wait as nothing has happened yet. The publicity of the activist investor will make it more difficult for Gavio to use the funds in a bad way for minority shareholders.

Lutetia Capital itself seems to be a contrarian event driven fundSuch an announcement of course would be highly beneficial for the stock. The boss of Lutetia is a Lazard veteran which is intersting as Lazard is a 5% shareholder of SIAS.

So at the moment I will watch and do nothing, howver I am tempted to “ride the coat tail” of the activist investor at some point in time and increase the exposure if they seem to be succesfull.

Edit: As AS said in the comments, price targets were adjusted downwards, but I usually try to ignore those “trend following” activities.

Edit: I jsut saw that already 3.8 mn stocks were traded whcih is 10 times the normal volume. Maybe this is some kind of sell out. So I will add 1% Portfolio Weight as of today to the SIAS position.

Digging deeper: Short interest and stock performance

Posted on by 11 comments

In my last post about potential short candidates, I said:

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.

In the comments, Winter correctly pointed out that one could also argue the other way around, the higher the short interest, the higher the possibility that the stock will drop.

Interestingly, for many trades, stocks with high short interests seem to be attractive long opportunities as pages like this show.

To quote them:

Stocks with high short interest are often very volatile and are well known for making explosive upside moves (known as a short squeeze). Stock traders will often flock to such stocks for no reason other than the fact that they have a high short interest and the price can potentially move up very quickly as traders with open short positions move to cover.

Googling around a littel bit I found the following interesting paper called Short Interest and Stock Returns

The introduction starts of supporting Winter comment:

It is now widely accepted that stocks with high short interest ratios underperform the market. This is a very recent bit of conventional wisdom, based largely on the evidence in Asquith and Meulbroek’s (1995) unpublished working paper for New York Stock Exchange (NYSE) and American Stock Exchange (Amex) stocks, and Desai, Ramesh, Thiagarajan, and Balachandran’s (2002) article for Nasdaq stocks. Both Asquith and Meulbroek and Desai et al report negative and significant abnormal returns for firms with short interest ratios of 2.5% or more, where the short interest ratio is defined as the ratio of short interest to shares outstanding. Both papers also report large secular increases in short interest ratios, and skewed cross-sectional distributions, with most stocks having short interest ratios of less than 0.5%, and very few firms having a ratio exceeding 10%. Prior to these papers, the conventional wisdom was that large short positions presaged positive future returns, caused by the flow demand from short sellers covering their positions

The paper is worth a read. In general, the authors confirm that stocks with high short ratios seem to underperform:

Consistent with other studies, we find that the higher the short interest ratio, the lower is the subsequent performance. That is, firms with short interest ratios of 10% or more underperform those of 5% or 2.5%.

Their research shows that the effect is not so significant as previously thought and that it only works for equal weighted portfolios, not for market cap weighted portfolios.

They paper also gives a good overview of ohter papers on this topic, it seems to be that this area is not as well researched as others.

Their results can be summarized with this quote:

We find that the underperformance of high short interest firms is fairly brief, and only rapid portfolio turnover allows us to realize this underperformance. We also examine whether high short interest is based only on valuation concerns and find that convertible bond arbitrage is a major reason for high short interest as well. Finally, we show that the performance of high short interest NYSE-Amex stocks is more severe and consistent than for their Nasdaq 24 counterparts over the period July 1988-2002, and that small cap firms make up a large portion of the firms that are highly shorted.

Howver they question if a such a strategy can be effectively implemented especially as the overall universe of high short interest stocks is relatively small.

One aspect is missing in the paper in my opnbion : As far as I could see they did not explicitly incorporate volatility of returns. So the outperformance could be just the effect of a much higher volatility of those shares.

However as a first summary, I will have to rethink my gut feeling to stay away from stocks with high short interest.

It might make also sense for short idea generation to use those short interest tables, especially AMEX/ NYSE stocks.

Currently the NYSE page from the link mentioned above shows the following top 20 NYSE stocks with high short interest:

TEA Teavana Holdings, Inc. NYSE 60.04% 8.81M 38.31M Retail (Grocery)
HGG hhgregg, Inc. NYSE 54.35% 17.26M 37.24M Retail (Technology)
BPI Bridgepoint Education Inc NYSE 53.93% 17.23M 52.21M Schools
BKS Barnes & Noble Inc NYSE 49.68% 38.38M 60.20M Retail (Specialty Non-Apparel)
GME GameStop Corp. NYSE 49.46% 131.18M 133.98M Retail (Technology)
KBH KB Home NYSE 47.06% 65.44M 77.10M Construction Services
SVU SUPERVALU INC. NYSE 41.95% 210.68M 212.26M Retail (Grocery)
ESI ITT Educational Services, Inc. NYSE 39.67% 24.44M 24.75M Schools
OSG Overseas Shipholding Group Inc NYSE 38.20% 23.27M 30.45M Water Transportation
MCP Molycorp, Inc. NYSE 37.87% 56.05M 96.40M Metal Mining
RSH RadioShack Corporation NYSE 36.41% 98.46M 99.43M Retail (Technology)
CRR CARBO Ceramics Inc. NYSE 35.98% 19.73M 23.09M Oil Well Services & Equipment
USNA USANA Health Sciences, Inc. NYSE 35.81% 6.17M 14.99M Personal & Household Products
ONE Higher One Holdings, Inc NYSE 34.55% 32.64M 56.81M Schools
SAM Boston Beer Company, Inc., The NYSE 34.14% 8.40M 8.79M Beverages (Alcoholic)
AM American Greetings Corporation NYSE 33.79% 34.51M 35.54M Printing & Publishing
GDP Goodrich Petroleum Corp NYSE 33.26% 26.03M 36.37M Oil & Gas Operations
URI United Rentals, Inc. NYSE 31.78% 63.05M 63.77M Rental & Leasing
CJES C&J Energy Services Inc NYSE 31.63% 39.07M 51.89M Oil Well Services & Equipment
FIO Fusion-IO, Inc. NYSE 31.15% 49.59M 90.12M Computer Hardware

Some of those stocks even show up regulary on value blogs. So another application of such lists could be to even more scrutinize “value stocks” with high short interest as they might be potential value traps.

A final word on European stocks: Unfortunately, the disclosure of short interest in Europe is close to non-existent. Also, as the Volkswagen example showed, “cornering” is still an issue with European stocks. So in any case one should be extra carefull with single stock shorts.

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

Posted on by 14 comments

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.

Performence review April 2012 & comments

Posted on by 10 comments

April 2012 was a relatively good month for the Portfolio. Against a Benchmark Performance in April of -2.6%, the portfolio showed a gain of +1.2%. YTD, the portfolio is now up 12.6%% against 11.9% of the Benchmark.

Performance overview:

Bench Portfolio Perf BM Perf. Portf. Portf-BM
2010 6394 100      
2011 5509.87 95.95 -13.8% -4.1% 9.8%
           
Jan 12 5972.48 99.27 8.4% 3.5% -4.9%
Feb 12 6275.00 105.90 5.1% 6.7% 1.6%
Mrz 12 6329.66 107.22 0.9% 1.2% 0.4%
Apr 12 6168.20 108.02 -2.6% 0.8% -3.8%
 
YTD 12 6168.20 108.02 11.9% 12.6% 0.6%
 
Since inception 6168.20 108.02 -3.5% 8.0% 11.6%

The outperformance in April was mostly triggered by the jump in the share price of AIRE KGaA, which went up from around 11 EUR to 17 EUR at month end. Luckily, I only sold a very small amount after the 10% tender offer from the company itself (~1000 stocks) before the AIG offer of EUR 17 was announced on Monday April 30th.

The relatively weak performance of my Italian positions (EMAK, Buzzi, Piquadro, SIAS) was partly off set by the gain in the FTSE MIB short position.

Other notable outperformers in April were WMF and AS Creation.

Portfolio Changes April:

Nestle: fully sold
Piquadro: 0.5% added at around 1.43 EUR (50% hedged with FTSE MIB short)
AIRE KGAA As discussed above, I sold 1.060 stocks at 13.52 EUR (25% of trading volume) before the announcement on Friday April 30th with a gain of 54.50%. On Friday April 30th, the volume was so high, that I sold 22.952 stocks (position down to 5%) at 17 EUR with a gain of 94.26%, almost a double.
Installux: Beginning on April 30th, the first 55 shares were bought. This will be a long way to establish a position…

Portfolio composition April 30th

Name Weight Perf. Incl. Div
Hornbach Baumarkt 5.1% 4.92%
Fortum OYJ 4.4% -14.56%
AS Creation Tapeten 4.0% -4.02%
BUZZI UNICEM SPA-RSP 5.1% -12.75%
EVN 2.8% -13.72%
Walmart 3.9% 18.75%
WMF VZ 4.2% 44.32%
Tonnellerie Frere Paris 4.9% 7.07%
Vetropack 4.6% -2.99%
Total Produce 5.0% 15.98%
OMV AG 2.2% -14.99%
Piquadro 1.6% 8.78%
SIAS 2.4% -6.40%
Installux 0.1% 0.00%
     
Drägerwerk Genüsse D 8.9% 44.61%
IVG Wandler 2.2% 7.70%
WESTLB 6.9% 5.6% 35.25%
DEPFA LT2 2015 3.1% 29.04%
AIRE 4.8% 96.72%
HT1 Funding 4.7% 5.92%
EMAK SPA 4.8% 0.96%
DJE Real Estate 4.2% -3.18%
Praktiker 2016 2.5% 0.75%
     
     
Short: Kabel Deutschland -2.2% -23.07%
Short: Green Mountain -1.6% 14.30%
Short Ishares FTSE MIB -2.4% 3.74%
Terminverkauf CHF EUR 0.2% 4.43%
     
Tagesgeldkonto 2% 14.9% 0.00%
     
Summe 100.0%  
     
Value 50.1%  
Opportunity 40.8%  
Short -6.0%  
Cash 14.9%

Outlook & Strategy:

As a contrarian investor at heart, current times are quite exciting. There are a lot of industries and entire countries (PIIGS, utilities, financials) which trade at very cheap valuations. Of course there are a lot of macro risks on the horizon. As a value oriented contrarian investor one should howver focus on the long run. The “This time is different” argument should also be applied on the positive side, meaning that the world will not end, people will still need bank accounts, electricity or want to travel in the future.

So the focus should be less on guessing and interpreting daily Central Bank actions or election outcomes but on analyzing cheap companies with lasting business models, no matter where they are located.

Greed and fear are the two worst investment advisors available. Because of this, one should not fear investing in currently depressed businesses if they are deemed to be lasting, on the other hand one should try to avoid chasing expensive past “winners” like consumer stocks, flats in Munich etc.

However this is often easier said than done, especially if one takes the daily news “tsunami” too serious. My personal technique is to read a historical finance book from time to time in order to get the “right perspective” and that current problems are nothing new. At the moment I am reading “Lombard Street” from Walter Bagehot, I hope I can post a rview soon.

Catching up: Green Mountain, AS Creation and AIRE KGaA Tender offer at 17 EUR

Posted on by 9 comments

What a week for the portfolio ….

Green Mountain

Green Mountain imploded (again) last week after they lowered their guidance.

Green Mountain had many attributes making it a “perfect short”:

+ shady accounting as revealed early by Sam Antar at WhiteCollarFraud
+ massive insider sales
+ negative free cashflows
+ pumped up growth through expensive acquisitions
+ expiring patents in 2012

David Einhorn, now credited for “revealing” the over-valuation was actually relatively late in the game. However one has to admire his timing capabilities. I was relatively early and hat to swallow a intermediate -40% loss on the position before I got into the money.

The question is now, how low can the stock go ? If GMCR is a “real business”, then the current valuation seems to be fair. If they are a real fraud, the stock could go down much further. Also one should remember that momentum always goes in both directions. Nevertheless, as the easy money on the short seems to have been made, I will exit (cover) the short on Monday.

AS Creation

AS Creation reported surprisingly good Q1 numbers which show that at least with a certain time lag, the company does have some pricing power in its core business. The outlook is mixed as they expect losses when they ramp up the Russian JV.

Nevertheless, I think the first quarter gives credibility to the managment as they always told investors that on an annual basis they are able to pass cost increases onto clients.

AIRE KGaA Tender offer EUR 17 per share

After I was already happy that my special situation investment AIRE KgAA offered to buy back 10% of the shares at 14 EUR, suddenly AIG real estate issues an offer for 17 EUR per share for the whole company.

Luckily, I only sold relatively small amounts of AIRE at around 14 EUR. As someone said before: Sometimes it better to be lucky than smart.

What I find interesting about the offer are two things:

– first, they seem to have already 31.8% of shares under their control, so from their existing 7.85% the have bought 24% through option contracts

– second, based on the official NAV of around 21 EUR, the 17 EUR offer in theory does not leave a lot of upside for AIG. However one has to remember, that AIRE KGaA owns a lot of highly leveraged equity positions in US developements which were pretty aggresively written down to zero over the last few years. So there is lot of positive optionality in the legacy portfolio. If some of those projects are “coming back”, the NAV could be significantly higher. AIG Real estate as the previous manager should know those projects pretty well.

If I remember correctly, they were active in residential, multi tennant developements. Maybe this has to do with AIG’s decission from early April to go back into real estate investments on a larger scale. I had actually read this but didn’t really make the connection.

For the time being, I will wait for the final offering documents to decide what to do, however I will continue to sell down to 5% of portfolio weight.

As Green Mountain was the ideal short, AIRE KGaA was the ideal special situation:

+ unusual vehicle (listed, closed real investment fund, US and Asian real estate, only German listing)
+ difficult to analyse (lot of debt, but non-recourse)
+ bad name / scandal, however no direct exposure (AIG)
+ early entry of “activist” investors (Grevenkamp, Swiss guy)

From a timing perspective, I was very lucky in the portfolio, getting in at a very low point in January 2011. The chart shows that with such investments, one usually has time to analyse and invest. It doesn’t reallypay out to invest driectly after the drop:

After the big drop in 2008/2009, the stock was “sleeping” now for almost 3 years before something happened.

That is something to keep in mind for investing in such situations. I t takes some time until the value will be (hopefully) realised by someone.

Recent Entries »