Herb Greenwood
October 26, 1998
SECTION: FORTUNE INVESTOR/OPINION; Against The Grain; Pg. 320
LENGTH: 733 words
HEADLINE: Short-Sellers: The Market's Real Heroes
BYLINE: Herb Greenberg
BODY:
Go ahead--call me the chief apologist for those scoundrels, the short-sellers. Tell me I'm carrying water for them. Allege I'm on their payrolls. Charge me with collusion. I've heard it all before, during the nearly dozen years I've openly identified short-sellers as sources for my daily financial column. I've heard the shorts referred to as immoral, unethical, and even un-American, and by quoting them I've been lumped by some investors into the same category.
Still, I've never backed away from tapping into the short-selling pipeline, because from what I've seen, it is the short-sellers who really wear the white hats on Wall Street. Who do you think gave me the early heads up to the troubles at dozens of companies--including Sunbeam, Boston Chicken, Snapple, and Planet Hollywood--long before their stories, and stocks, unraveled? (Investors who heeded those warnings saved themselves a bundle.) Where do you think my competitors get most of their ideas for stories about companies that are up to no good? (Hint: Chances are, they didn't get them from Securities and Exchange Commission documents.) And where do you think the SEC gets the first round of research for many of its cases?
Going short means borrowing shares, then immediately selling them with the hope, if all goes according to plan, of buying them back later at a lower price. As a cross between private detectives and forensic accountants, short-sellers make their living ferreting out fraud, debunking hype, and spotting businesses that are about to turn bad. "Shorts serve as a check on excessive promotion," says Mike Long of Rockbridge Partners, who tracks their performance. It was a rough business throughout much of the bull market, when momentum investors bought some stocks merely because they were going up, but that kind of behavior created opportunities for the short-sellers. "These companies have one characteristic in common," says money manager Doug Kass of Kass Partners, who has taught a course on short-selling at Yale University. "At the height of their short interest, the momentum itself is created by the strength of the bull, which carried these stocks to ludicrous levels."
Yet nobody, and I mean nobody, wants someone coming along and telling him his stock will soon be worth a lot less than it is today--not even if there's a truckload of evidence. Several years ago, when he was putting out bearish reports at a small investment firm in Florida, Kass was denounced by analysts at the big investment banks for issuing a "sell" recommendation on casino stocks when, as it turned out, they were at their peak. Similarly, Mike Harrold of Avalon Research didn't make friends last February when he issued a short-selling report on Ciena. He warned that competition could put pressure on Ciena's earnings. Investors and other analysts ignored him, and the stock continued to rise another 50%, thanks to a takeover offer from Tellabs. But that deal fell apart, and the stock has lost 90% of its value. "Every issue we brought up six months ago came true," says Avalon's Alan Jacobs.
That's not unusual, nor is it surprising. There's little argument that the shorts do some of Wall Street's best research. "You develop a certain discipline," says Jacobs. "Some things just don't make sense." And because shorts often put their own money at stake, they tend to dig deeper for details. For example, some years ago several firms shorted U.S. Surgical, in part because of a switch by hospitals from disposable equipment--like the products made by U.S. Surgical--to reusables. To prove it, "we made 1,100 telephone calls to operating room nurses, purchasing organizations, and hospital administrators," says Jacobs. U.S. Surgical, which peaked at 100, tumbled to less than 20 two years later.
Inevitably, many companies blame the shorts, and some even wage public battles. The classic was CML Group, a favorite of shorts several years ago. During a panel discussion at a Montgomery Securities investment conference in the mid-1990s, Chairman Charles Leighton suggested in front of the entire room that all of the money managers in attendance gather later in the back room and squeeze the shorts. CML's stock was at its peak of around 30 at the time; it now trades for pennies.
I rest my case.
HERB GREENBERG is senior columnist for The Street.com. His E-mail address is herb@thestreet.com.
GRAPHIC: COLOR PHOTO: PHOTOFEST, [Cartoon drawing of Superman]
LANGUAGE: ENGLISH
LOAD-DATE: October 7, 1998 |
