Since SI is profiling this thread in it's email newsletter, perhaps our affiliate's
short picks from BusinessWeek might be of interest:
"COVER STORY
Smiling as Highfliers Blow Up
Short-sellers eye the next batch of overreachers
The Nasdaq is collapsing? Dot-coms are getting decapitated? Well, break
out the bubbly--if you're a short-seller, that is. Shorts wager on price
declines by selling shares that they have borrowed, in the hope of buying
them back at far lower prices. It's a risky strategy, because losses are
theoretically unlimited--and for most of the past few years, there was
nothing at all theoretical about the pain suffered by shorts. But short-sellers
have flourished as high-tech stocks and the Nasdaq have nosedived. And a
slowing economy should continue to provide opportunities for this
not-always popular investment technique.
The dot-com mania, which brought forth nutty valuations that massacred
short-sellers, is largely a thing of the past now. But even so, pockets of
mispricing persist. Professional short-sellers--mainly hedge-fund
managers--believe there are still plenty of stocks that are worthy
short-selling candidates. The ideal shorts are companies that have
problems that are overlooked by the market--or vastly overblown share
prices.
RED INK. Consider Sensar Corp. (SCII), which develops instruments
and measuring devices for the pharmaceutical and biotech industries. The
company's stock has risen 745% over the past year because of the
unbridled enthusiasm its products have inspired. Sensar shares rose 25%
on June 6 alone, for example, with the news that Motorola Inc. (MOT)
would demonstrate a telecom application from Net2Wireless Inc.--a
company soon to merge with Sensar--at a forthcoming conference. But
shorts are targeting the stock, betting that the market is wrong.
Rambus (RMBS), a developer of semiconductor interface technology, is
getting short-seller interest for similar reasons. The California company was
one of the most visible casualties of investor disenchantment with high tech,
zooming from 66 in December to a high of 471 on Mar. 14--only to fall to
150 in mid-April. Rambus is back in the 220 range. But one noted short,
who requested anonymity, wagers that Rambus' red ink--its
second-quarter loss was $167 million, or $6.98 a share--is not about to
stop flowing. The competition, he believes, is too tough.
Shorts are noted for their intensive research into company foibles. And
some employ experts--physicians, for example, to scrutinize medical
stocks. That's because the same rule applies to shorting as to buying
stocks--don't wager against a stock unless you understand why it might be
about to go down in flames. That is the credo of high-tech maven Steve
Worthington, a former venture capitalist who runs Barbary Coast Capital
Management in San Francisco. Barbary Coast is a traditional hedge fund
that buys stocks as well as shorts them. That distinguishes it from the
short-only funds that do nothing but bet against stocks.
''GOING NOWHERE.'' Lately, Worthington has found tech stocks to
be a happy hunting ground for short-selling. One of his favorites is CDW
Computer Centers (CDWC), a direct marketer of PCs. CDW has
shrugged off the high-tech declines this year, climbing 59% so far and a
190% over the past year. But Worthington believes that the Vernon Hills
(Ill.) company's $5 billion market capitalization is ridiculous. He believes
investors have a far too rosy view of CDW's ability to generate profits
from operations.
Worthington likes companies with heady prospects--that is, prospects that
mainly exist in the heads of their managements. Optimal Robotics Corp.
(OPMR) is one of Worthington's top picks. The Montreal company makes
automated self-checkout systems for retail outlets. It's a great idea, in
theory, and investors love the company: Optimal's Nasdaq-traded stock
has zoomed 328% over the past year. The company has deals with major
retailers such as Wal-Mart Stores Inc. and Kroger Co., but Worthington
has a somewhat less flowery vision of the company's prospects. ''This ain't
gonna happen,'' says Worthington. He is underwhelmed by the company's
marketing of its products.
Another company that Worthington feels is ''going nowhere fast'' is
ProsoftTraining.com (POSO), which provides Internet courses and
certification programs. This former OTC Bulletin Board stock has had a
remarkable surge, climbing from a low of 2 last August to just under 30 in
early March, though it has recently fallen to 14 1/16. Still, it is up 37% this
year and almost 400% over the past year. The company has only just
begun to turn a profit, but Worthington believes its price-earnings ratio of
178, based on Street estimates, and 50% a year projected long-term
growth rate, are ludicrous. Its margins are simply too low to sustain such
prices, he notes.
Worthington and other shorts are likewise zeroing in on Data Return Corp.
(DRTN) in Irving, Tex., which provides Internet hosting services. The
company was taken public by Bear, Stearns & Co. last year, and, at a
recent price of 22 7/8, its stock has fallen 57% this year--though that's still
far above the IPO price of 13. Shorts emphasize the company's negative
cash flow, which they believe may continue for some time.
Potentially overvalued high-tech stocks aren't the only targets for shorts.
Another is the solid, New York Stock Exchange-traded retailer Kohl's
Corp. (KSS) This department-store chain has been a standout performer,
thanks to its recent strong same-store sales numbers--up 9.8% in May,
more than twice the 4.6% average for all retailers. But shorts believe the
gains are simply too big to be sustained and that future comparisons will be
far less favorable--and will massacre share prices. Also running a
short-seller gauntlet is the low-tech Tricon Global Restaurants Inc. (YUM),
a leading operator of fast-food joints. Shorts' mouths are watering because
of the recent bankruptcy filing of Tricon's major supplier, AmeriServe
Food Co. They are wagering that AmeriServe's demise will increase
Tricon's costs.
Excessive hype, bankruptcy, cash burning like autumn leaves--such is the
stuff of short-selling. Do it well, and you can watch the market crash and
exclaim with genuine joy, ''Ain't it wonderful!''
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