THE STOCKS MOST LIKELY
NOT TO SUCCEED
Even in a red-hot market, huge
numbers of declining issues have
short-sellers soaring
Yes, a bull market is raging. And the response from the short-selling
community can be summed up in two words: So what? Making money
by betting that stocks will decline--never an easy feat in even the worst
markets--is actually becoming one of the most reliable ways of making
money, despite the increases in the stock indexes. With vast numbers
of stocks declining, professional short-sellers racked up hefty
profits--15% and better in the first three months of 1997 alone.
One reason is the declines that have beset many small-company
stocks, particularly the most heavily promoted micro-cap stocks. Such
companies remain the most reliable short-selling candidates. While
outright frauds--the Nirvana of short-selling--are difficult to find,
short-sellers remain on the prowl for the next Bre-X Minerals Ltd. or
Centennial Technologies Inc. One happy hunting ground is the Internet
and the online services, where investor overenthusiasm is rife. Small
investors are finding that checking out questionable companies is
easier than ever, with corporate filings on the Securities & Exchange
Commission's EDGAR Web site (page 108).
UNBOWED. Some short-seller favorites have already had big declines,
and shorts are wagering that the worst is yet to come. A good example
is Solv-Ex Corp., a controversial Albuquerque company that has a
process for extracting oil from tar sands. Short-sellers continue to pile
into the company's NASDAQ-traded stock, even though it has declined
54% so far this year as investor doubts have mounted. Shorts say that
the stock has been easy to borrow, making it a good bet for
short-selling for even small investors. To engage in a short sale, an
investor must borrow shares and then sell them, in the hopes of being
able to replace the stock at a lower price.
Another perennial short favorite that has been easy to borrow
lately--''like water,'' says one short--is Presstek Inc. in Hudson, N.H.,
which is developing new printing-press technology. Presstek's stock is
extremely volatile. The company's shares have soared recently,
climbing 18 points in two days, on news that would hardly budge most
other companies: a stock split. Shorts believe the company is destined
for greater things--on the downside. ''Where's the printing revolution?''
sneers one short. But Presstek is unbowed. ''We believe that the
company's business performance, both financial and operational, has
continued to prove the shorts wrong and will continue to do so,'' a
spokesperson says.
Also turning up lately on the short-seller radar screens is Avant! Corp.,
a Sunnyvale (Calif.) software developer. The company's legal troubles
are making short-sellers practically weep with joy. Avant! incurred
criminal charges on Apr. 16, when prosecutors in Santa Clara County,
Calif., accused the company, five top executives, and two other
persons of felony theft charges for allegedly stealing the source code
for one of its software products. On June 2, word hit the financial wires
that the company had been hit with a shareholder class action, which
cited the criminal charges. An Avant! spokesman said the company
was vigorously fighting the criminal charges and lawsuit. The
company's stock declined to a 52-week low of 9 3/4 when the charges
were announced, but it has since roared back to 22--even shrugging off
the shareholder suit. One prominent short, who requested anonymity,
believes that the market's faith in the company is misplaced. He is
wagering on a share price decline--with a target price of zero.
Another potential ''zero target'' for the shorts is Cellular Technical
Services Co., which develops billing and data-processing software for
the cell-phone industry. Cellular's stock has fallen 30% so far this year,
and shorts believe it's headed for a roller-coaster ride--with a section of
track cut away. One short notes that the company's phone-security
software is heading swiftly toward obsolescence, because the next
generation of cell phones won't require it. Indeed, the company
acknowledged in one recent prospectus, in a lengthy listing of risk
factors, that ''technological changes or developments in the cellular
industry...could reduce or eliminate demand for the company's
user/device authentication products.''
NOTICEABLE FLAWS. Yet another short-seller is wagering against a
Canadian gold mining stock--International Precious Metals Corp.,
which trades over the NASDAQ Small Cap Market. International was
trading at just over 2 in December, but climbed to 13 in March. But
then, Arizona authorities maintained that IPM's ''Black Rock'' mining
site, under development near Phoenix, has little or no gold, contrary to
the company's statements. An IPM spokesman insists the company's
assessment of the site is correct and says that IPM has filed notice of a
possible suit against the Arizona officials. This short-seller is voting with
the Arizona authorities, however, and feels IPM's shares are destined
to collapse.
Some worthy short-selling candidates are otherwise sound
companies--but happen to have noticeable flaws that might well send
their share prices lower. One outfit in this category is Shared Medical
Systems Corp., which is being shorted by Manuel Asensio, who runs
Asensio & Co., a money-management firm in New York. Asensio is
prominent among shorts for his willingness to attach his name to short
sales, which has won him no fans among corporate managers. He has
gained prominence for his public war of words with Diana Corp.--a war
that he has clearly won, with Diana's shares plummeting 97% over the
past 12 months. One company that has recently caught Asensio's
attention is Shared Medical, now trading at about 50, which Asensio
believes will soon decline to the area of 25 to 30. Asensio is wagering
against the company in the belief that its software sales are destined to
decline. Not surprisingly, Shared doesn't, well, share that view. ''Our
long-term goal is sales growth in the 10% to 15% range,'' says Shared
Vice-President Michael Costello.
Asensio is betting that a share-price decline is also in the offing for one
high-flying stock, Action Performance Co. Action is a designer and
marketer of collectibles--such as miniatures of sports vehicles--and
also sells T-shirts, key chains, and other souvenirs. Asensio believes
the company's price-earnings ratio of 40 is ''ridiculous.'' He sees the
shares, now at 23 5/8, plummeting to 12 in the not-too-distant future.
RIFE WITH DANGER. One trait that shorts often look for is a weak
balance sheet. U.S. Office Products fits the bill, in the view of Asensio
and other short-sellers. Shorts note that U.S. Office has high debt, and
Asensio says its ''cash flow has fallen out of bed.'' He believes the
company is destined for a severe decline. No way, responds U.S.
Office Chief Financial Officer Donald Platt, who describes the
company's debt as reasonable and its cash flow as strong. Another red
flag that shorts often seize on is insider selling--as at Liposome Co., a
pharmaceutical outfit. Shorts believe that its high market
capitalization--$1 billion--is unsupported by the company's prospects.
Even though short-selling is more lucrative than it has been in years, the
usual dangers have not gone away. Shorts are always vulnerable to
manipulators driving share prices upward, putting them in a ''short
squeeze'' that can force shorts to buy back their shares at a loss. But if
you're patient, fear not. If a stock is truly lousy, you will win in the long
run.
By Gary Weiss in New York |
