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 the luxury goods sector

Jewellery retailer Signet (SIG), owner of H.Samuel, Ernest Jones and Leslie Davis, has been the focus of short-sellers for the last six months, particularly since October.  The percentage of market cap on loan (%MCOL) rose from 9% on October 7^th to 12% today.  Signet’s %MCOL (12%) is more than double the UK retail sector average (4.85%).

Traders started borrowing Signet at the end of June 2007 and it has proved to be a very profitable trade.

At the other end of the spectrum, Tiffany (NYSE:TIF) has also seen a rise in short interest, with the percentage of market cap on loan rising from 2% on October 22 to 5% today. Utilisation stands at 10%, up from 5% in late October. Institutional asset managers have been buying TIF throughout the year and they have been increasing their exposure even during the price weakness of the last month. Days to cover stands at five days because volume in the cash equity is so high.

Summary of borrowing in other companies with exposure to the luxury goods sector

Richemont (CFR) has seen a rise in borrowing since mid-September, but the percentage of market cap on loan is much lower than Tiffany at 1.4%.

Borrowing in Hermes (RMS) is off its summer highs at 5.54% of the market cap, while traders have been covering shorts in Bulgari ever since May.  5.12% of its market cap is currently on loan.

Tod’s (TOD) Utilisation has doubled since May, from 25% to 50%, while the market cap on loan has risen from 8% on November 1^st to 11.26% today.

Bang & Olufsen (BO B) has been a highly successful short trade for patient investors.  The borrow in B&O first started rising back in April 2006, rising from 6% to 14% by the end of 2006.  B&O’s share price was fairly resilient until May 2007, since when it has fallen from DK 750 to DK 485 today.  Long-only funds have been buying on weakness during November, causing the utilisation to fall from 86% in mid-November to 80% today.  The percentage of market cap on loan remains stubbornly high at 14.38%.

Charts available on request.

UK and American pre-Christmas retail sector

There has been a noticeable rise in short interest in Woolworths (WOW) in the past six weeks. We blogged on Woolworths on October 12. On October 10th the percentage of Market Cap on Loan (MCOL) was 8%, compared to the latest figure of 11.67%.

This is high compared to the rest of the Retail sector, where 4.87% of the market cap is on loan. The graph below compares the last six months’ lending activity in Woolworths (red), the Retail Sector (green) and Woolworths’ share price (orange) - which has continued to plummet since June – down from 28.00GBP then to 15.00GBP today.

Woolworth’s Utilisation has risen by 100% in the last six weeks - from 25% on October 10 to 50% today.

The most borrowed company in the retail sector is HMV (HMV), with 33.72% of its shares on loan .  This is a long-standing short, which was one of the most successful shorts in 2006. The group’s Utilisation has risen from 60% in June to 77% today.

Debenhams (DEB), who we blogged on November 5, has the second highest %MCOL at 17.57%, significantly lower than HMV, but a significant increase since June when the figure stood at 2.5% (see graph below.)

JJB Sports (JJB), who recently reported losses after England’s failure to qualify for the European Cup next summer, have the fifth highest %MCOL of 12.24%.

Over in America, electrical consumer store Circuit City (CC) has been a target for shortsellers since June 2007.  The share price has fallen from 20USD in January to 6USD today.  Shortsellers came late to this trade, but the %MCOL on loan remains very high, putting the company into the top decile in the S&P 500.  %MCOL currently stands at 14% and Utilisation is 37%. Circuit City is by no means the most heavily shorted stock in the North American Retail Sector. Urban Outfitters (URBN) is higher at 15.46%, as is booksellers Borders Group (BGP) at 15.29%. Borders has a Utilisation figure of 55.60%, which has risen steadily as the share price fell from 16.00USD to 12.00USD today.

Please click here to read our report on the US Apparel Sector.