USRX NEWS 06.05.96
The Wall Street Journal -- June 5, 1996
Heard on the Street:
Short-Sellers Face a Bubble That Won't Burst
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By E.S. Browning
Staff Reporter of The Wall Street Journal
They like to think of themselves as Wall Street's hunter-killers, but these days they're the prey.
Short-sellers, who try to profit by picking stocks that will decline rather than rise, thought the frothy, inflated market was
made for them this year -- a bubble waiting to burst. Instead they are losing money even faster this year than last. The
carnage is so widespread that some smaller short-sellers may not survive.
James Chanos, the best-known and possibly the biggest pure short-seller with more than $200 million under management,
lost more than 30% of his money in the year's first four months, according to people who track the business. And his
Kynikos Associates lost money again in May. That is close to the 40% loss he posted for all of last year, even though this
year's market gains are only about one-third as big as last year's. Mr. Chanos wouldn't discuss his trading.
Michael Murphy, whose Overpriced Stock Service is one of short-selling's most widely followed newsletters, has lost 24%
in his own short fund this year. Mr. Murphy, based in Half Moon Bay, Calif., near San Francisco, so despairs of his ability
to find likely stock decliners these days that, after a disastrous month of March, he pulled most of his money out of the
short-selling arena. With less than $5 million in his short-selling fund now, he says he holds more than 50% in cash, "to
defend the value of the fund."
As recently as 1993, Harry Strunk, a stockbroker and investment consultant in Palm Beach, Fla., monitored 20 different
groups that each managed at least $5 million in short-only investments. Today only 11 remain, and Mr. Strunk says 10 of
them lost money in the first four months of this year.
"It's been sheer hell," says Benjamin Kopin, a Chicago-based short-seller whose Lynx Partners manages about $10 million
and is slightly down on the year. He has limited his losses by going 45% into cash this year. He is waiting for signs that the
market's speculative fervor is cooling.
Short-sellers are simply investors who borrow stock they think is poised to decline, sell it and hope to replace it later at a
lower cost -- thereby pocketing the difference. To give the stocks a push, they sometimes try to publicize negative research
suggesting that promised products won't materialize, that earnings will disappoint or even that a company has been
misleading investors. Because their work is controversial, most decline to comment on it, at least publicly.
They can lose huge amounts if, instead of falling, the stocks soar. That has been the case this year with Iomega, U.S.
Robotics, Diana, Presstek and many others.
These once-obscure stocks sport prices ranging from 50 to 500 times the companies' trailing 12-month earnings. Their
soaring prices have been fueled by word of mouth, by broker recommendations, by Internet chat and also by the flood of
money this year into the aggressive, small-stock mutual funds that buy shares in such companies.
At various times over past months, after negative news developments or skeptical press reports, short-sellers' target stocks
have declined -- only to take off again. Short-sellers have been hammered because the stocks often generally have failed to
fall back to the price where the short-sellers first sold them.
Presstek, for example, fell 16 to 134 yesterday, a decline of more than 10% in one day, following negative press reports
including an article in The Wall Street Journal that big shareholders were selling the stock of the printing-technology
company. But it remains up 42% on the year, far higher than it was when most shorts targeted it. Diana, a onetime food
company that has announced a high-speed telephone switch some investors think could help build the Internet, fell 5
yesterday to 79. That's still triple its year-end price.
Even when they called a stock right, the shorts often were run over by the bulls. Mr. Kopin, for example, recalls selling
Hewlett-Packard short in expectation that the computer maker would announce disappointing results for its quarter ended
April 30. He was right. Hewlett-Packard did disappoint, and its stock fell nearly 8% in a single day. But he still lost money
because it soon headed up again. It never got back down to the level where he shorted it, just a few days before the negative
earnings news.
Those hit hardest are investors such as Mr. Chanos, who have insisted on keeping their money out of cash and in short
sales. He has told investors privately that by staying in the short-selling market he offers them a hedge on their conventional
stock-market investments, protection in case high-flying stocks or the entire market begins to plunge. To provide that hedge,
he has continued to bet that certain technology, medical or even restaurant stocks could decline. So he has been flattened.
Investors who follow his activity say he is resolutely continuing to make short sales, and that his funds still include tens of
millions of dollars invested with him by the Ziff family.
One of the rare short-selling groups that has actually stayed in the black this year is Kodiak Capital of Santa Monica, Calif.,
managed by Lee Mikles and Mark Miller, who are said to manage more than $125 million in several different short funds.
Kodiak is up perhaps two or three percentage points this year, according to those who follow the market. It has picked a few
short sales that worked -- such as the troubled construction company Morrison Knudsen. But the main reason for its success
is simply that it has kept as much as 60% of its funds in cash-making it less a short fund than a money-market investment --
as its managers wait for the climate to shift.
Some of the short-sellers' longtime backers have abandoned them over the past few months. "What's happening to
everybody is that their clients are just one by one pulling their money out," says Mr. Murphy, the newsletter writer. In
addition, he says, about one-third of his newsletter subscribers also have been failing to renew their subscriptions.
Rumors have circulated that longtime short sellers such as Mr. Chanos and David Rocker are about to go out of business --
rumors that investors who know them insist aren't true. And in fact, Mr. Strunk, the investment consultant, says there are
signs that some investors are starting to put some new money with short-sellers again now, to protect themselves in case the
market has gone overboard on speculative stocks.
Some mutual-fund managers whose charters allow them to make short sales are doing so as well, reflecting their worries
about market excesses. Paul Stephens, who runs the Robertson Stephens Contrarian Fund in San Francisco, says 24% of
the fund's money now is in short sales in 35 companies. His telephone hotline now is telling investors that the short sales
have taken about 7% off the return the $928 million fund otherwise would have recorded this year. After roaring off to a
21% gain in the first quarter, the Contrarian fund went nowhere in April and May, its return is little changed despite the
market's record highs.
Some short-sellers are taking heart in the fact that the market has slid again over the past week or so. "We did pretty well at
the end of May," says one hopefulsounding veteran short-seller. "But overall, we had a down month, so it's a little early to
claim that things are turning our way."
And yesterday, the market was up.
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Short Killers
Some stocks whose strong gains have decimated short-sellers, who bet they would fall.
% GAIN
COMPANY BUSINESS THIS YEAR
Iomega Data storage 406%
Diana Wholesale food 197
and telecom
U.S. Robotics Data comm. 114
Presstek Printing 42
America Online On-line comm. 41
Organogenesis Biotechnology 24
QualComm Wireless comm. 23
DJIA 11
Copyright © 1996 Dow Jones & Company, Inc. All Rights Reserved. |
