Laurent Condon, a retired trader in Blanaz, France, won my 15th annual Short Sellers Don’t Have Horns short-selling contest.
Short sellers pick a stock to go down, not up. They sell borrowed shares, and must buy them back later – but if the price falls in between, they profit.
Many people scorn the shorts. But I call my contest “Short Sellers Don’t Have Horns” because I believe the shorts serve useful purposes, countering hype and maintaining an informed dialogue among investors.
I engage in short selling for a few of my clients who have high risk tolerance.
Condon’s Win
Condon took first place in my latest contest, which ran from September 30, 2017 to September 19, 2018, by picking MGT Capital Investments Inc. (MGTI, Financial) to decline. It fell 91.4%.
MGT, he said, was “seen as a proxy play on Bitcoin,” which was then soaring. The company describes itself as one of the largest U.S. Bitcoin miners. Said Condon, “There is no proof that the company can make a buck from that activity.”
On September 7 this year, the Securities and Exchange Commission issued a complaint against Robert (Rob) Ladd, MGT’s CEO. It charges him with helping to orchestrate a “pump and dump” scheme involving cybercurrencies.
On September 15, the company announced that Ladd will take a leave of absence, adding that it has confidence he is innocent.
For his prize, Mr. Condon will receive a CD featuring the piano music of Bobby Short.
For the coming year, Condon is picking Tilray Inc. (TLRY, Financial). The company, based in British Columbia, Canada, develops cannabis-based medications. It is expected to post sales of about $42 million this year, yet its market value is more than $11 billion.
Condon says that valuation is ridiculous. In addition, he thinks the “tobacco stocks will win the new legal cannabis sector.”
Winograd Second
Stewart Winograd, a market data analyst for DTN in Omaha, Nebraska, came in second. He had a 37.8% gain on shorting Snap Inc. (SNAP, Financial).
When he entered the contest, Winograd said that Snap shares were trading for 26 times the company’s sales, “an optimistic level compared to industry stalwarts” like Google (then 6 times sales). “If everything goes right, that valuation limits the upside,” Winograd wrote, “and everything does not always go right.”
For the next contest, which begins September 30, 2018, Winograd picks a short sale on Shopify Inc. (SHOP, Financial). The company operates a cloud-based e-commerce platform. Again, he relied on the price-to-sales ratio to make his choice, calling it “one of my favorite tools.”
Shopify, he says, had a “nice rise the past couple of years.” It now trades at 19 times sales, which Winograd calls “pretty high.”
The average stock these days trades for 2.3 times sales. Even that is well above the historical norm of about 1.5.
Vihstadt Third
Finishing third was James (nickname Joe) Vihstadt, a retired investor in Papillion, Nebraska. He gained a theoretical 20.3% by shorting Tesla Inc. (TSLA, Financial).
Tesla shares, he says, are “held up by a cult mentality.” They currently trade for about $299 a share. “One of these days the stock will fall to double digits,” Vihstadt predicts. “It is a totally overvalued company.”
For the coming year’s contest, he will short Tesla again.
Caution
A word of caution. Short selling is a high-risk investment technique for one simple reason: Potential losses are unlimited. When you buy a stock, the most you can lose is 100% of what you invested; the stock can’t decline past zero.
But when you sell short, there is no limit on how high a stock can rise, so you can lose more money than the amount you initially commit.
Want to Enter?
If you would like to enter the 2018-2019 contest, just send me an email with the following information:
- Your name.
- Your Address.
- Your phone number (important in case I need to interview you).
- Your occupation.
- The stock you want to short.
- The reason you think it will decline.
Contestants are not required to sell the stock short in real life, only in theory. However, you may choose a stock that you are short in reality if you choose.
The next contest will run from October 2, 2018 through September 14, 2019. All entries must be postmarked or time-stamped before midnight on October 1.
Send entries by email to [email protected] or by mail to John Dorfman, Dorfman Value Investments, 279 Elliot Street, Suite 100 H, Newton Upper Falls MA 02464.
For 2018-2019 the first-place prize will be a shortcake from the bakery of your choice. Second and third place carry no prize but glory.
Disclosure: I own shares in Alphabet (GOOGL) personally and for most of my clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].
