Short Stories

Data Explorers Short Portfolio: Up 30% in 8 Months

Data Explorers has been monitoring the performance of a portfolio of short stocks selected by our screening tools since 7th June 2007.  The performance of this paper portfolio shows that the average return (calculated on an equally weighted basis opening price to opening price between the date when the story was published and 28th January 2008) was 29.7% per stock compared with a (short) return of 10% in the FTSE All World during the same period.

Total based on alerts since 7th June 2007	30%
Total based on news since 29th October 2007	9%
Overall Total since 7th June 2007	19%
FTSE ALL WORLD since 7th June 2007	10%

Of the thirty-eight stocks in the portfolio, only four have subsequently risen in price since the publication date, namely Yamana Gold, Hagemeyer, Calmaine and Fast Retailing.  Outstanding successes on the short side were: American Home Mortgage (delisted), Erinaceous Group (down 95% since publication), Northern Rock (down 78% since we highlighted it in a report on EMEA banks), Ambac (down 69%), Black's Leisure (down 65%), Martha Stewart (down 59%) and IKB (down 55%).  Download short_portfolio.xls

While some people may find it macabre to examine stocks which have lost so much value, we believe it is important to highlight the fact that stock borrowers (hedge funds and prop traders)came early to many of the themes which have dominated the last eight months, namely subprime, property and retail.  We would also highlight the fact that the cost of borrowing many of the stocks in our portfolio is not taken into account, and nor is the bid-offer spread. Please refer to our disclaimer concerning investment advice.

After 29th October, we began to focus more on stocks which feature in the daily news.  These stocks produced a return of 9% on average between 29th October and 28th January, while the FTSE World index produced a return of 14% in the same period.

If you would like further information about the methodology used to screen for potential short stocks, please contact Alex Hofmann (+44) 207 392 4010 or Email: ah@dataexplorers.com

Short Interest in James Hardie

According to our securities lending data, short sellers have substantially increased their positions in James Hardie (JHX) over the past two months. The Australian building materials group announced on September 30 a decrease of 32% profits compared to the same period last year, with second quarter net sales decreasing by 5%.

Traders have been aware of this, and initially started borrowing James Hardie in January 2006, when the %Market Cap on Loan (MCOL) stood at 2%. Since then it has increased steadily to 6% until just after the results in early October, when the borrow increased from 6% to 13% today. The share price dropped in January 2007, from 10.00AUD to 6.00AUD today, with an inverse correlation on July 7 between the rise in the borrow and the fall in share price, which means it has been a very profitable trade (please see graph).

For those investors who still believe James Hardie’s price is going to drop further, there is still some supply, although Utilisation is rising significantly, at 43% today and up from 30% on October 1. The usual two million shares traded in James Hardie rose in the last fortnight to around six million. For those wishing to close their positions, there are 16.53 Days to Cover.