Rising markets seem to make activist short sellers more hesitant in H1 2017
Activist short sellers launched just 100 campaigns in the first half of 2017, compared to more than 250 in each of the last two years, according to data published in the Activist Insight Monthly Half-Year Review 2017, produced in association with Olshan Frome Wolosky.
In interviews for the feature, short sellers expressed concern that valuations could be stretched further by a “1999 super-surge” before falling back, leading them to focus on cases of fraud instead.
Globally, activist short selling has grown into a major phenomenon in Canada, where campaigns have risen from 9 in 2014 to 18 in 2015 and 21 in 2016. It has also kept pace in Hong Kong, but fallen in Japan after a breakthrough last year.
To read the article, featuring insights from the likes of Marc Cohodes, Richard Pearson and Ben Axler, click here.
In 2015 and 2016, activist short selling soared to 274 and 264 campaigns respectively. Some, but not all, growth came from the U.S., where the number of campaigns increased by 50% between 2013 and 2015 before leveling off. This year, activity in North America Is down, while levels in Asia and Europe remain consistent compared to the first IS now less six months of 2016. Richard Pearson, told Activist look at botl Insight Monthly that he was passing on more ideas than usual, as markets cannot an argume be relied on to digest the information properly. At least three times in the past two years, observers had called an end to the bull-market but been proven wrong, he says, citing external shocks such as China, Brexit and the U.S. election. “The problem from the short side is that we could see another 1999 super-surge before the markets correct,” he says.
As a result, short sellers are being more cautious in their approach, while also trying to take advantage of the growing interest in their research. Ben Axler of Spruce Point Capital Management says overvalued companies and lower quality public offerings are ideal for short sellers, but adds that “the bar is higher.” He is basing his short positions on material omissions and malfeasance, he says, rather than valuation alone. Nonetheless, “The amount of research we’ve been publishing has accelerated,’ he adds.
As an added danger, cash-rich, growth hungry companies offer takeover risk, as a bunch of investors in Straight Path Communications found recently. Amazon’s acquisition of Whole Foods Market may also have caused some to reconsider the kind of deals that are possible in 2017.
Ironically, both long-biased activists and short sellers are chasing some of the same stocks. Short campaigns at consumer and industrial goods companies make up a larger proportion of 2017 campaigns than they have done since 2013 – twice as much in the latter case. The healthcare and technology sectors remain the most popular targets, accounting for almost half of all activist short campaigns within the first six months of 2017.
Banana Republic ng, there )f a One market gaining a lot of attention recently you will is Canada. The number of shorts has risen hostile steadily, from 9 in 2014 to 18 in 2015 and 21 t rather last year. Marc Cohodes, who has racked up at least seven targets there, most recently excavation sides of company Badger Daylighting, says the country’s lack of a national regulator allows t.” “shady operators to follow the path of least
resistance.” He compares the country to a banana republic, and some other short sellers are not far behind.
Old stomping grounds
For now, activist short sellers seem to be giving Japan-based companies a period of respite, launching only one short attack in the country in the first half of 2017, compared to ten last year. Hong Kong, however, remains a favorable target with five campaigns in the first six months of this year, compared with nine in the whole of 2016.
Despite fears of stock manipulation and unpredictable regulators, which sanctioned Citron Research for its activities in the country, short sellers are still expecting bumper returns from Hong Kong.
So far, they’ve been lumpy — Muddy Waters short target Man Wah Holdings recovered strongly after it initial slump, as did Fullshare Holdings. Hua Han Health and China Huishan Dairy Holdings remain suspended. Against that backdrop, a new report from Blazing Research predicting China Household Holding will be investigated by regulators and eventually delisted looks bold.
Dan David, Chief Investment Officer for FG Alpha Management and co-founder of research outfit Geolnvesting, thinks things are getting better, however. As the regulators in [Hong Kong] and elsewhere get serious about becoming competition to the U.S. exchanges they are beginning to understand that they have to take critical opinions seriously,” he says. There is now “less of a chance that you will meet with a hostile regulator but rather one that will at least look at both sides of an argument.”
Back in the U.S., the Nasdaq remains far and away the most popular exchange for shorts, perhaps reflecting the appeal of technology-driven bubbles. One popular short idea on the exchange has fewer followers among the dedicated short community, however.
“Short and hold on names like Tesla has been very difficult,” says Pearson, returning to the theme of markets continually looking upward. Cohodes agrees. “I could care less about fucking Tesla. I could care less about who runs the thing,” he says. “I would rather focus on Badger Daylighting, where I think things are made up.” lib
Commenting on the data, the report’s editor Josh Black said, “Activist short selling has clearly been affected by rising markets, which has raised the bar for the amount of work that needs to go into a thesis. Nonetheless, dedicated short sellers continue to look for ideas and raise funds, suggesting there could be a flood of activity in the near future.”
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