Some people vilify short sellers — people who bet on selected stocks to go down.
It’s un-American, the detractors say, to bet against companies. Short sellers spread nasty rumors, and short selling serves no purpose of capital formation as conventional investing does.
As a person who has been known to sell a stock short from time to time, I disagree with these critics. Short selling doesn’t provide capital to promising ventures, but it helps keep widows and orphans from paying inflated prices for a stock wafting on a wind of puffery.
Some short sellers do spread malicious gossip. But more harm may be done by “long” investors who make up false tales about the virtues of a company that really is just a flimsy front.
That’s why I run an annual short-selling contest called “Short Sellers Don’t Have Horns.” The winner is the person who selects a stock with the biggest one-year loss on a total-return basis (capital gain or loss adjusted for dividends).
The Winner
Oren Spiegler won the latest contest. Spiegler is a hearing officer for the state of Pennsylvania, primarily adjudicating workers compensation cases. He says that he entered the contest as an intellectual challenge and does not sell stocks short in real life.
Spiegler’s short was Radio Shack Corp. (RSHCQ, Financial), a chain of consumer electronics stores. Last September, he said he believed “that the company will not be able to secure financing to continue in business and that the death knell is beginning to sound.” Five months later, Radio Shack was bankrupt and Spiegler was on his way to victory.
On paper, Spiegler achieved a short seller’s dream. His target company went bankrupt, and the stock went to zero. In that circumstance, a short seller achieves a 100 percent profit, the maximum possible in a short transaction.
For the 2015 to 2016 short selling contest, Spiegler is shorting Sears Holdings Corp. (SHLD, Financial). “Sears (and) Kmart are stores of yesterday,” he says. The stores “tend to be dingy (and) badly in need of renovation, which the chain no longer (has) the money to fund. The stores are burning through money — the only thing keeping them afloat being significant real estate holdings, much of which are being liquidated to remain in business.”
Runners-Up
Second place in the contest went to Randy Jeffs, a money manager in Irvine, Calif. Jeffs has twice won my annual Derby of Economic Forecasting Talent (DEFT, Financial). In the short-selling contest, he focused on Kate Spade & Co. (KATE, Financial), which declined 28%, giving him as a (theoretical) short seller a 28% gain. Jeffs said the company was “in the competitive (and) faddish apparel business,” sold for a high multiple of earnings and had a high debt-to-equity ratio.
For the 2015 to 2016 contest, Jeffs will go with a short sale on Six Flags Entertainment Corp. (SIX, Financial), a Grand Prairie, Texas, company that operates 18 theme and water parks. Jeffs says the stock is expensive, the company eliminated a management team that he “had faith in years back,” and that it jettisoned a consultant he “thought was first-class.”
Third place went to Damien Liddane, a software engineer in London. Using “Fibonacci-based technical indicators,” he selected Time Warner Inc. (TWX, Financial), which obliged him with a 4% decline.
The average result for contestants this year was a loss of about 17%, proving once again (as this contest has often demonstrated) that short selling is a difficult art indeed.
A word of caution: Potential losses from short selling are unlimited. For that reason, I believe inexperienced investors should avoid shorting, and even experienced ones (except for some professionals) should keep short positions to a small portion of their portfolio.
Rules and Reward
If you would like to try your hand at short selling — at least on paper — enter my contest.
The next contest runs from Sept. 30 through Sept. 16, 2016.
To enter, email [email protected]. Entries should contain six items: your name, address, occupation, phone number (which I need in case you win and I want to interview you), the stock you wish to sell short and the reason you think it will decline.
The stock selected must have a market value of $100 million or more.
For purposes of the contest, you do not have to borrow the stock (as you would in real life) or put up any money.
Entries must be transmitted by midnight on Sept. 30.
The contest carries a prize for first place, always related in some way to the word “short.” For his victory, Spiegler will receive shortcake from a local bakery.
