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

Beazer Homes in the spotlight

Beazer Homes, the $312m US homebuilder which rose 6.84% yesterday, hit our radar today after Citadel announced that they had cut their stake in the company from 5.7% to 4.1%.  Beazer has been a favourite borrow among hedge funds for months and the cost of borrowing is exceptionally high.  If you believe that hedge funds are better-informed than their index and mutual fund cousins, the news that Citadel has cut their holding does not look positive for the stock.  With nearly 45% of the market cap on loan and days to cover (short interest ratio) standing at 18 days, the stock is a popular target for squeezing.  However, hedge fund borrows are currently as high as they were in September last year. (AH)

The American v British property companies

Barratt Homes announced today it had suffered a 14 per cent fall in house sales to private buyers this autumn.

Speaking to Maggie Urry on today’s FT.com, CEO Mark Claire said Northern Rock’s problems, combined with rising interest rates had hit housebuyer’s sentiment and people were simply not prepared to pay what they did at the beginning of this year.

What is interesting is that 7% of Barratt’s Market Cap is on loan, having risen in September from 4% to 6%.

Taylor Wimpey has a slightly higher amount out on loan today (8%). Redrow is marginally lower – 6.94%.

There is pressure on people’s ability to afford new housing, so the demand for the materials to build these houses will affect the prices of the construction and materials sector’s stocks.

Carillion, who we blogged on last week, are in the process of an attempted merge with Sir Alfred Mcalpine. Such is the nature of a takeover bid that Carillion’s %MCOL stands today at 10.83%, but other reasonably high %MCOL are also Marshalls, at 6.59%, and glass and mineral fibre makers Superglass Holdings, at 5.78%.

But sub prime woes appear to be more acute on the other side of the Atlantic. As far as American housebuilders are concerned, short interest has risen, which could mean that we will see a rise in shorting over here in the UK. Centex Corp’s %MCOL today stands at 20%, and D.R. Horton Inc is at 12% with Utilisation at 42.68%. Pulte Homes is another American company who’s %MCOL stands at 16.76%, up from 10% since October 2^nd.