.Beard Wins 2002 `Shorts Without Horns' Crown: John Dorfman
By John Dorfman
Boston, September 20 (Bloomberg) -- Some people believe short sellers are the Devil incarnate. I believe the opposite: that most short sellers serve the public good.
That's one reason I sponsor the annual ``Short Sellers Don't Have Horns'' contest in which people pick the stock they think will fall the most.
Anson Beard, founder of New York-based Archimedes Capital Partners, won this year's contest, my fourth. He did it by picking Genesis Intermedia Inc. last September as the stock most likely to fall most precipitously over the next 12 months. It lost 99.9 percent of its value.
Hedge fund managers like Beard -- a former analyst at Julian Robertson's famous Tiger Fund -- sell stocks short to make profits. More conservative investors might consider doing it to help cushion their portfolios against stock market declines. For both types of investors, shorting involves risk. Short sellers borrow stock and immediately sell it, hoping the price will fall before they have to repurchase the shares to return to the lender. If the price does fall, they profit; if it rises, they lose. The technique is risky because potential losses are unlimited.
Rumor Mongers
With so much at risk, some short sellers have been known to spread false rumors about a company to drive down its stock. Those are the bad apples, and in my judgment they are in the minority. Short selling serves a useful purpose by protecting naive investors from wildly overpaying for a stock. It deflates the prices of stocks that have ballooned because of rumor, hysteria or hype.
Shorting with discretion -- and by that I mean going 10 to 20 percent short if you have the time to closely monitor your positions -- can help protect your portfolio if the market declines. I engage in short selling for about half of my clients If you'd like to test your short-selling acumen without putting up real money, why not enter our fifth annual contest. You'll find the rules at the end of this column.
Last year's contestants scaled the heights with their shorts. In the almost 12 months since the contest began Sept. 30 and closed this Sept. 13, the Standard & Poor's 500 Index fell 13 percent with dividends reinvested. Our average contestant's stock fell 39 percent -- three times as much as the S&P. If you're a short seller, that's a 39 percent gain.
Dark History
Beard's contest-winning choice offers some guidance about short-selling techniques. He picked a stock that had what he considered many red flags.
The controlling stakeholder in GenesisIntermedia, a telemarketer that provides Internet access in shopping malls, is Adnan Khashoggi. He is a Saudi arms dealer known for his role during the Iran-Contra scandal of the mid-1980s. According to an Oct. 25, 2001, article by Bloomberg News reporter David Evans, Khashoggi reaped millions of dollars by taking out loans using his Genesis stock -- which was worth more than $18 a share in June 2001 -- as collateral. The loans were not repaid, the article said.
Last November, the Securities and Exchange Commission opened a formal fraud investigation into the activities of Rafi Khan, an ex-stockbroker who was banned from the securities industry in May 2001. Khan allegedly recommended GenesisIntermedia and three other stocks to investors in exchange for receiving stock or warrants from those companies.
When Beard submitted his contest entry on September 18, 2001, Genesis shares traded for about $16 a share. By the contest's official start date on Sept. 30, the shares had stopped trading and didn't reopen until January. When trading resumed, the stock traded at 26 cents a share. That was the starting point for my contest, but I think Beard deserves praise for shorting the stock when it was at $16.
Today you can buy a share of GenesisIntermedia for about one- hundredth of a penny.
The ImClone Model
Beard, who credits his colleague, John Mackin, with spotting GenesisIntermedia as a short, says Archimedes made a nice profit from the pick. His only regret: Not being able to short more of it. Shorts borrow shares through their brokers, and Beard said he couldn't find enough to satisfy his demand.
Beard plans to enter the contest again this year, and isn't tipping his hand on stocks he's considering. He says public discussion can make a stock harder to borrow and unnecessarily anger the company he picks.
It's a good bet he'll look for a company he believes has been over-hyped, just as runner-up Rudy Luo did last year. Luo, a stockbroker at New York-based Westrock Advisors who also placed second in my 2000-2001 contest, picked ImClone Systems Inc. as his short. The biotechnology company fell more than 86 percent during the contest period. The Food and Drug Administration last December declined to approve its cancer drug, Erbitux. The firm's CEO, Samuel Waksal, was subsequently indicted for allegedly tipping off relatives about the rejection before the news was public.
Amazon's Turn
For the coming 12 months, Luo leans toward shorting Amazon.com Inc., the Internet book retailer. ``The stock has stayed overvalued for a long time,'' he says. Amazon has debt greater than stockholders' equity, and has not posted a quarterly profit since it went public in 1997.
Taking third-place was Mike Kelly, a managing director at Frontpoint Partners in Greenwich, Connecticut. He suggested shorting US Airways Group Inc., which filed for Chapter 11 bankruptcy protection in August. The stock fell almost 86 percent during the contest period.
Now it's your turn. Pick the stock that you think will dive the furthest between its closing prices on Sept. 30 and Sept. 15, 2003. You don't have to actually be short the stock to play. Send me your pick by letter or e-mail at the address below, making sure to include your name, phone number, e-mail address, and occupation. I'd also appreciate a sentence or two on the rationale behind your choice.
There are only two rules. The stock you pick must trade on a U.S. exchange, although it can be a foreign stock listed here directly or as an American depositary receipt. Also, your entry must be postmarked or time-stamped by midnight September 30. So sharpen your pencils and pull in your horns. Your reward? Past winners have received a biography of Napoleon -- a famous short person -- and a CD by singer Bobby Short. I'll cook up something similar for Anson Beard, and maybe for you.
Please e-mail entries to jdorfman@bloomberg.net, or mail them to John Dorfman, Dorfman Investments, Suite 1900, 101 Federal Street, Boston, MA 02110. |
