Whitney Tilson is a value investor that I follow for idea generation. He tends to borrow ideas from other value investors in creating his portfolio. Why not borrow ideas if they are good ones ?
He recently discussed how he views shorting stocks as a key part of his investment management strategy and as a tool to enhance returns.
Here are a few of his more interesting observations:
“ We focus on classic value investing on the long side, but also remain committed short sellers for two primary reasons. The first is simple: We believe it is a moneymaking opportunity. The market often overvalues certain companies and we can profit when their valuations returns to earth. In addition shorting remains an excellent tool for hedging against risk”
He feels that shorting is especially important in a market trading at a 20% premium to historical valuation levels despite significant areas of concern. The two primary areas of concern that Tilson acknowledges are the housing market crisis and sovereign debt risk.
Tilson feels that he can more confidently invest in promising companies on the long side if his portfolio is hedged against broad-based market and economic declines.
There are three areas that Tilson is particularly focused on shorting today. Those being wildly hyped companies where the underlying business does not match ownerships salesmanship, good companies with particularly overvalued stocks and companies with decaying business fundamentals. His one example of an overly hyped company is the controversial Interoil (IOC, Financial) that has regularly promoted a resource base in remote Papua New Guinea. His current shorts on overvalued good companies includes Netflix (NFLX, Financial) and Lululemon Athletics (LULU, Financial). And short positions on businesses with decaying fundamentals are Garmin (GRMN, Financial) and Pre-Paid Legal Services (PPD, Financial).
On a more macro basis Tilson is still very bearish on homebuilders. They are playing this by shorting the ISHARES DOW JONES US HOME CONSTRUCTION ETF (ITB). He thinks the housing market will remain troubled for some time with eight million homeowners currently not paying their mortgages. Under almost any reasonable scenario a few million of those homes will be sold after foreclosure which will create a significant amount of inventory to compete against new homes. Tilson expects that there is little need for new homes in the U.S. for a couple of years, so he doesn’t expect builders to fare well. He obviously expects that their stock prices won’t fare well either.
He recently discussed how he views shorting stocks as a key part of his investment management strategy and as a tool to enhance returns.
Here are a few of his more interesting observations:
“ We focus on classic value investing on the long side, but also remain committed short sellers for two primary reasons. The first is simple: We believe it is a moneymaking opportunity. The market often overvalues certain companies and we can profit when their valuations returns to earth. In addition shorting remains an excellent tool for hedging against risk”
He feels that shorting is especially important in a market trading at a 20% premium to historical valuation levels despite significant areas of concern. The two primary areas of concern that Tilson acknowledges are the housing market crisis and sovereign debt risk.
Tilson feels that he can more confidently invest in promising companies on the long side if his portfolio is hedged against broad-based market and economic declines.
There are three areas that Tilson is particularly focused on shorting today. Those being wildly hyped companies where the underlying business does not match ownerships salesmanship, good companies with particularly overvalued stocks and companies with decaying business fundamentals. His one example of an overly hyped company is the controversial Interoil (IOC, Financial) that has regularly promoted a resource base in remote Papua New Guinea. His current shorts on overvalued good companies includes Netflix (NFLX, Financial) and Lululemon Athletics (LULU, Financial). And short positions on businesses with decaying fundamentals are Garmin (GRMN, Financial) and Pre-Paid Legal Services (PPD, Financial).
On a more macro basis Tilson is still very bearish on homebuilders. They are playing this by shorting the ISHARES DOW JONES US HOME CONSTRUCTION ETF (ITB). He thinks the housing market will remain troubled for some time with eight million homeowners currently not paying their mortgages. Under almost any reasonable scenario a few million of those homes will be sold after foreclosure which will create a significant amount of inventory to compete against new homes. Tilson expects that there is little need for new homes in the U.S. for a couple of years, so he doesn’t expect builders to fare well. He obviously expects that their stock prices won’t fare well either.
