Tag Archives: Short selling

Digging deeper: Short interest and stock performance

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 This is a very recent bit of conventional wisdom, based largely on the evidence in Asquith and Meulbroek’s (1995) unpublished working paper for New York Stock Exchange (NYSE) and American Stock Exchange (Amex) stocks, and Desai, Ramesh, Thiagarajan, and Balachandran’s (2002) article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.

Inefficient Markets – Solon SE edition: Shorting to Zero

One of the “ineffecient” corners of the stock markets are definitely penny stocks, in particular stocks of bankrupt companies.

A very good example is currently Solon SE, the once highflying German solar panel manufacturer.

Solon became bankrupt in mid December 2011. The stock dropped already a lot before:

However, after the news that an Indian company might be interested in some of the assets, the share price went up from around 0,23 EUR to 0,30 EUR, giving the shares a market cap of around 5 mn EUR.

Before going into the liquidation value anaylsis, we should look at the debt structure. Solon has created a lot of debt in the last years, in total around 400 mn in loans and bonds. Solon has one listed bond outstanding, a Convertible Bond from 2007 which would have matured end of 2012. Total outstanding amount is 132 mn EUR.

This bond is trading at 4% (!!! not 40%) of nominal value.

So in order for the shareholders to see a single cent of any liquidation proceeds, the bondholders will have to be paid in full. The likelyhood for this happening seems to be extremely low according to the bond price. The reason for this is that most of the asstes have been pledged for the bank loans after a debt restructuring in 2010.

One could now anaylse if the bond is correctly valued, but after any metric, the recovery rate for the bond will be significantly below 100%, which means the shareholders will get nothing.

So why on earth is someone willing to pay 30 cents for something thatr is worth nothing ? There are some theories about option value, but in my opinion the reason is most likely ignorance and “animal” spirits.

Fundemantally, Solon SE is a stock one can safely short down to zero, provided one can stand the volatility. For the portfolio I will initiate a short position of max. 2% from today, again following the 20% VWAP rule.

Edit: I have looked at the funding structure and my conclusion is that also the bond is a ZERO, but I would not want to bet on it. The safe bet is the stock.

Green Mountain – wird die Luft langsam dünn ?

Roddy Boyd (siehe Blogroll) hat einen recht langen Artikel zu Green Mountain eingestellt.

Kern des Artikels ist die Aussage, dass Green Mountain den Ausweis wichtiger Bilanzpositionen geändert hat und nur “ausgewählten” Analysten und Fondsmanagern dies erklärt hat.

So rather than opening a wide-ranging discussion of what has been a toothache for Green Mountain, the company simply dealt directly (and discreetly) with various hedge funds via E-mail. Here is the body of an explanatory note sent on May 9th to an independent analyst who has researched Green Mountain for several years, from director of Investor Relations Suzanne DuLong. [For legal reasons, the research analyst asked FI to remove the name’s of his firm and himself. The research shop’s E-mail was prompted by the questions of one of its paying clients, who in turn forwarded it to several other hedge funds.]

Sam Antar reagiert darauf mit einem recht detailierten Post in dem er klar zeigt (für Freunde des Forensic Accountings), dass auch die neuen Informationen irgendwie nicht ganz zusammenpassen.

Alles in allem ein weiterer Kratzer des “Erfolgsmodells” Green Mountain.