I noticed that Alza registered 150,000 shares with ML the other day. I wonder if this explains the early selling we saw today.
Here's the Barron's article from May that proclaimed VVUS was a great short when it was trading at around 17 since every one else was shorting it. Mike "Long"... tell us your next great short candidate so we can realize 100% returns in 5 months. I wonder how Short Alert can still have anyone's respect after its numero uno short pick doubled in price since May.
...we're just a couple points from 40...I can feel the squeeze coming....tomorrow?
Barron's
Monday, May 5, 1997
Short Shrift: What one firm gives to the idea Of heavy shorting as a bullish
sign
By Gene Epstein
As Wall Street used to tell it, a way to make easy money was to buy a heavily
shorted stock. The reasoning was simple. Short-sellers eventually have to cover
their positions by purchasing shares, so the short interest is just a measure
of future buying pressure that will soon drive up the price. This argument has
proved seductive for much of the bull market, in which many short-sellers have
been battered and some even have been driven out of business. But in truth,
short-sellers often are right, and their thumbs-down vote against a company can
amount to a signal worth heeding.
In fact, after reviewing New York Stock Exchange short-interest data from
1977 through 1990, Professors Paul Asquith of MIT's Sloan School of Management
and Lisa K. Muelbrook of Harvard Business School drew a simple conclusion about
what to do with a heavily shorted stock: Sell it.
Wrote the scholars: "If an investor already owns a stock that develops high
sustained short interest, the clear and strong advice is to sell the stock
immediately." Not tomorrow, but now. This tip was based on the simple finding
that such stocks seriously underperform the market, even tending to decline in
price. Their bottom-line conclusion: Short interest "does indeed convey
negative information" the market often ignores.
So maybe the short money is relatively smart money. And in this regard one
should scrap the typical image of the short-seller as the curmudgeon who hates
the world and spreads malicious rumors. Of last month's $136 billion worth of
short interest, perhaps $3 billion came from full-time shorts. The rest was
dispersed broadly among hedge funds and mutual funds that often look on the
long side as well.
Enter Mike Long and Nat Guild, co-partners of a Charlotte, N.C.-based firm
called Short Alert. If short interest does signal price weakness, they
reasoned, then maybe they could provide a service by massaging the numbers
issued every month by the New York and American Stock Exchanges and Nasdaq. And
if Wall Street persisted in its delusion that heavy short interest is a bullish
indicator, their analysis would have a special edge: The market wouldn't be
discounting the information right away.
So Long and Guild repaired to their computer for a few months and emerged
with a proprietary model keyed off short-sale data. One product of the model is
a hit list they call the "Most Dangerous Stocks," so named because they counsel
against holding any of them in your portfolio -- except, of course, as short
sales.
To sell short, an investor borrows shares owned by some other investor. His
broker gets the shares from a margin account, from an institutional investor,
or from another broker-dealer. (Some stocks are so heavily shorted that they're
hard to borrow.)
Regardless of how the shares are obtained, they're effectively pulled out of
someone else's holdings and then sold to a new buyer. Thus, 100 shares do the
work of 200, and the short-seller artificially expands the float for as long as
his position is maintained. Once he closes out his trade, the float is
effectively reduced. He engages in what's called "short-covering," a maneuver
that involves buying an equivalent number of shares and returning them to the
investor from whom they were originally borrowed. He profits if the price of
the initial sale exceeded that of the subsequent purchase.
Short-interest data provide a snapshot of all the as-yet-uncovered positions.
But, as Long is the first to admit, the numbers aren't completely reliable,
particularly when they show unusually large month-to-month fluctuations.
"Incorrect data are not going to have the impact that prices, exchange-required
filings, earnings reports and even volume would have," he admits. "So the time
spent collecting it and making sure it's right is not exactly on the same level
as the Manhattan Project." He and Guild expend a lot of effort on cleaning up
the figures, even to the point of calling a company directly when a number
looks particularly questionable.
Phone calls and related research also help them ignore companies whose short
interest doesn't necessarily reflect a negative market view. For instance, it's
common for traders to arbitrage between a short position in a company's stock
and a long position in its convertible bonds. (On the other hand, Short Alert
still believes Boston Chicken belongs on the "most dangerous" list, even though
a lot of its shorts are convertible bond arbitrageurs.)
But Long asserts that one kind of technically induced shorting shouldn't be
ignored in his analysis: short sales that result from trading put options. When
the public buys puts, market-makers frequently take the other side -- and then
hedge their exposure by shorting the underlying stock. A potential distortion
of the numbers? No, says Long, because puts are just another way of betting
that a stock will decline.
The table on this page shows the 15 stocks Short Alert now considers to be
the most dangerous to own.
How were they selected? While Long and Guild won't disclose their proprietary
methodology, they offer clues.
To begin with, in line with the system used by Asquith and Muelbrook, Short
Alert calculates "percentages of supply." This is represented in two ways:
short interest as a percentage of shares outstanding and then of the float --
the number of shares actually available for trading by the public. Sometimes,
the figures differ sharply. For instance, shorts on shares outstanding for
Yahoo! come to 8.5%, but on a float basis, the figure is a hefty 74.9%.
Short Alert also calculates the net new shorting that took place over a
month, which is the difference between this month's short interest and the
previous one's. This figure is expressed in dollars and taken as a percentage
of market capitalization. As Long points out, the percentages of supply ratios
are historical -- you don't know exactly when the positions were put on --
while the net new shorting ratio is current.
Then the list is taken through 15 possible "red flag" tests, mostly involving
a company's fundamentals. For instance, Cannondale gets a red flag because its
sales growth has slowed.
Long is circumspect about his track record, but he is willing to show how his
most dangerous picks have done in relation to the S&P 500. Not surprisingly,
since he started doing his analysis back in November 1995, the stocks chosen
have underperformed the S&P by a wide margin. And what's even more impressive
is that they have almost consistently declined in price, despite the bull
market's surging tide. For instance, the 25 stocks chosen as most dangerous in
mid-January 1996 fell almost 20%, on average, by the end of December.
So when it comes to viewing heavy short interest as a signal to purchase
shares -- buyer beware.
---
MOST DANGEROUS STOCKS
-- In today's bull market, these are the 15 names that Short Alert puts atop
its list of vulnerable companies. This analysis is based mainly on key
indicators of substantial short selling.
Market Short Interest Short New
Value To Shares Interest To Shorting To
(Millions) Outstanding Stock Float Market Value
COMPANY (SYMBOL): Vivus (VVUS)
$722 30.2% 43.6% 9.4%
COMPANY (SYMBOL): Redwood Trust (RWTI)
487 22.2% 22.5% 5.5%
COMPANY (SYMBOL): KLA Instruments (KLAC)
2,054 20.1% 27.1% 2.0%
COMPANY (SYMBOL): Hummingbird Communic (HVMCF)
362 20.2% 38.1% 1.3%
COMPANY (SYMBOL): Encad (ENCD)
413 11.3% 19.2% 4.8%
COMPANY (SYMBOL): Central Garden & Pet (CENT)
238 16.9% 17.4% 1.6%
COMPANY (SYMBOL): Cannondale (BIKE)
159 14.4% 22.2% 1.8%
COMPANY (SYMBOL): Consolidated Cigar (CIG)
141 15.6% 15.8% 1.2%
COMPANY (SYMBOL): Yahoo! (YHOO)
830 8.5% 74.9% 2.7%
COMPANY (SYMBOL): Western Digital (WDC)
2,699 13.4% 15.3% 6.4%
COMPANY (SYMBOL): Boston Chicken (BOST)
1,699 28.5% 48.3% 2.0%
COMPANY (SYMBOL): Ann Taylor Stores (ANN)
615 19.2% 43.7% -0.5%
COMPANY (SYMBOL): Agouron Pharmaceuticals (AGPH)
1,055 14.2% 16.4% 6.0%
COMPANY (SYMBOL): Jabil Circuit (JBIL)
771 7.5% 17.3% 1.4%
COMPANY (SYMBOL): PRI Automation (PRIA)
355 8.1% 10.1% 3.5%
All figures as of April 15.
Source: Short Alert
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