Musing on Stocks with Short Interest Ratio Above 10

Musing on Stocks with Short Interest Ratio Above 10
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Musing on Stocks with Short Interest Ratio Above 10

Two of my 35 stocks have short interest ratios over 10 days.  [Short interest ratio = amount of shares shorted / average daily volume]

I look at this statistic, and force myself to re-examine companies where the ratio is over 10.  Maybe there is something that I don’t know.

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The two stocks in question are StanCorp Financial Group, Inc. (NYSE:SFG) and National Western Life Insurance Company (NASDAQ:NWLI).  The short cases for both are based on a naive view of how insurance companies work.

Stancorp is a disability insurer.  Disability insurers often do badly in a recession because disability claims increase — people who are unemployed claim they are disabled.

There are two models for disability insurance: 1) Underwrite carefully, and pay all legitimate claims. 2) Accept all business, but when claims come in litigate with vigor.

Stancorp follows the first model.  I would never own an insurer that followed the second model, it is dishonest, and it is bad business.

Because StanCorp Financial Group, Inc. (NYSE:SFG) does its risk management up front, it does not get the same degree of unemployment masquerading as disability claims.  But the shorts don’t get this.  Thus the short interest ratio near 20.

Doesn’t bother me.  This is a undervalued company with a quality management team.  Low debt.  Sustainable competitive advantages in its niches.  One nice thing about being a knowledgeable insurance investor is that you can get a firm grip on the nature of the management teams, and invest in the good ones when they are out of favor.

With National Western Life Insurance Company (NASDAQ:NWLI), the short interest ratio is near 11.  Admittedly, it is an unusual company.  No analysts. Large controlling shareholder.  Hasn’t lost money in over 10 years.  Trades at less than 40% of adjusted book value.  Sells insurance policies to foreigners who want flight capital.

With interest rates falling, some shorts think some insurers will have difficulty meeting policy interest guarantees.  From my view, that is not the case with National Western, they have a large amount of long bonds to protect the guarantees.

Thus I say to the shorts: short all you want.  You will be buyers at higher levels.

Full disclosure: long NWLI and SFG for my clients and me

By David Merkel, CFA of Aleph Blog


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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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