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 insurance

According to today's FT, Fitch Ratings has downgraded Ambac, who we blogged on earlier this month, from triple-A to double-A, as well as its smaller rival Security Capital Assurance (SCA) from triple-A to A, "sending shares in bond insurers sharply lower."

It also said that: "private equity companies, including TPG, value investors such as Wilbur Ross and asset management firms, are all considering launching bond insurers in a move that could hamper efforts to aid troubled incumbents such as Ambac and MBIA."

Today, Ambac has a %Market Cap On Loan (%MCOL) of 27.35%, with a Utilisation percentage of 44.61%. MBIA's %MCOL stands at 25.54%, with Utilisation at 39.85%.

The borrow in SCA increased significantly in early October, when the %MCOL rose from 7.5% to nearly 25% in the space of three weeks. Since then it has ebbed around the 15% mark. Interestingly the borrow in SCA has now reduced; down from 13% earlier this week to 6.15% today (please see graph). The share price has dropped from $35 in May to $5 today, although there has been a slight rise in share price which could explain why short sellers have decreased their positions.

Utilisation has also decreased. The percentage of what is available to borrow that was on loan once reached 70% (in late October), but it has now dropped down to 22%, although this is an increase from 20% at the start of this week. For those wishing to return shares, there are 11.85 Days to Cover. The rest of the North America Insurance Sector's Utilisation stands at 8%, but the rest of the US Equity (Other) Market stands at 20%, just below SCA's.

The borrow has also risen in PMA Capital Corp (PMACA), who are in the same sector as SCA and who have a debt service. The %MCOL has risen from 3% in January 2007 to 9% today. The share price has also dropped, from $11 in June to $8 today. It is still relatively easy to borrow the stock, with Utilisation at 27%.