They’re Bullish on Being Bearish : Investing: Short sellers, who profit from a fall in stock prices, got burned last year. But some still bet certain local shares will take a turn for the worse.
Wall Street’s bad news bears, the short sellers, are starting to growl again.
Short sellers, who try to profit from stocks dropping in price, were pummeled last year because the market went up instead. As a result, several of the so-called “shorts” vanished from the market, and some prominent remaining short sellers saw their assets evaporate by 50% or more.
But the bears aren’t all in hibernation. They’re still placing bets that certain stocks will take a turn for the worse, including several companies based in the San Fernando Valley and Ventura County. They include Glenfed Inc., Walt Disney Co., Amgen Inc., IHOP Corp. and Great Western Financial Corp.
Other institutional investors also are shorting the stocks, not as “pure plays,” but as part of technical hedging strategies, in which they simultaneously buy the stocks “long” and short the stocks to protect themselves regardless of whether the shares rise or fall.
So far in 1992, the shorts “are having a pretty neutral year,” reflecting the flatness of the overall market, said Michael Murphy, who publishes the Overpriced Stock Service, a newsletter in Half Moon Bay, Calif., for short sellers and manages a short-selling fund of about $2 million.
But amid widespread uneasiness about the market’s outlook, the shorts are growing hopeful that their fortunes will improve later this year.
“I’m bullish on being short,” said Robert Holmes, president of Gilford Securities in Chicago. Without providing details, Holmes conceded “it’s a fair statement” that his firm suffered major short-selling losses last year. But now “the market in general is overpriced and many stocks specifically are overpriced,” he asserted.
While most investors buy a stock and hope it rises in price, short sellers borrow a stock and immediately sell it in the hope that its price drops. If it does, the shorts buy the stock back--known as “covering”--return it to the lender and pocket the difference in price.
The risk, of course, is that the stock could go up, leaving the short seller with a loss. And whereas a stock can drop only 100%, its potential gains--and thus short sellers’ potential losses--are unlimited.
Shares that have been sold short, but not yet repurchased, constitute what is known as a stock’s short interest. Although some analysts question whether short interest alone is a reliable gauge of investor sentiment, it does provide an indication of whether a stock is gaining short sellers’ attention.
(Short interest among all New York Stock Exchange-listed issues exceeded 800 million shares as of mid-June for only the third time in history. And short interest among NASDAQ stocks hit a record 389 million shares.)
One way to view each stock’s short interest in context is to compare it with the company’s total shares outstanding. With most companies, short interest amounts to 3% or less of all the stock. Such is the case with Lockheed Corp., Dole Food Co. and Disney.
If the ratio is much higher than that, the stock is likely to be a big target of short sellers. A case in point: Glenfed, the ailing thrift holding company in Glendale. Its short interest as of June 15 totaled 3.6 million shares--or 10.5% of its total.
It’s easy to see why. Glenfed, the parent of Glendale Federal Bank, has been suffering major losses because of the real estate slump--including a $106.7-million loss in its fiscal third quarter ended March 31--and there is speculation that the company eventually will be seized by federal regulators.
Glenfed’s stock currently trades for only about $4 a share, but “it’s a $4 stock on its way to zero,” predicted Holmes.
Another short favorite is IHOP, the Glendale-based parent of the International House of Pancakes restaurant chain, whose short interest amounts to 9.9% of its total shares outstanding. IHOP has been pursued by short sellers since it went public a year ago at $10 a share; these investors contend that IHOP relies too heavily on one-time franchising fees that could dwindle.
But IHOP hasn’t made it easy on them. The company’s earnings have been rising--they doubled in this year’s first quarter, to $972,000--and the stock has stayed well above $10, closing Monday at $13.63 a share in NASDAQ trading.
Disney also is healthy, yet the Burbank-based entertainment giant also “has gotten to be a popular short,” said Murphy. One reason: Expectations for Euro Disney in France “just got too high,” and Disney “is not likely to reap any huge benefits in the middle of a European recession,” he said.
As for Amgen, the high-flying biotechnology company based in Thousand Oaks, the stock already has rewarded some short sellers by dropping 17% so far this year. But it’s not viewed as having blockbuster potential for the bears.
Amgen is biotechnology’s biggest success story to date, with solid earnings growth. As one short seller put it: “Usually you make a lot of money shorting the worst company in an industry group, not the best.”
The short-sellers had trouble making any money in 1991, and some were forced to abandon the strategy altogether. For example, a short-selling partnership affiliated with the investment firC. Dunnavan & Co. in Plymouth, Minn., left the business after the major investors in its $22-million short fund pulled out.
“Short selling was just too much of a timing strategy,” said Neil Dolinsky, a Dunnavan vice president. “You make all the money in one swift downturn and then what do you do? You still have to eat while the market’s going up, which is most of the time.”
Moreover, it’s generally agreed that some speculators last year intentionally bought up stocks that the bears had shorted. The idea was to force the short sellers to cover their positions, thereby driving up the stocks’ prices even further--a strategy known as the “short squeeze.”
As a result, several short sellers who previously were willing to disclose their picks publicly are now reluctant to tip their hands.
“We all went through a bad experience where people ganged up on our stocks,” said Holmes.
Joe Feshbach, a partner in Feshbach Bros., a Palo Alto firm that may be the nation’s best-known short seller, said, “If you want to whine about short squeezes you might as well not be a short seller.”
“But for a number of us,” he said, “there had been a feeling of impunity about the size and vulnerability of our positions, and last year caused us to rethink that.”
For now, short sellers are optimistic. Among other things, they see a potential gold mine in the imbalance between the widely followed Dow Jones Industrial Average of 30 stocks and the broader market indexes, such as the Standard & Poor’s 500 composite index.
As trading opened Monday, the blue-chip Dow Jones industrials had risen 5% this year, but the S&P; 500 had slipped 0.4%. And the NASDAQ composite index, measuring the over-the-counter market, is off 2.7% so far this year.
The three measures typically move in relative tandem. The recent divergence, however, has some short sellers hoping that the Dow Jones industrials--which include Disney--will soon pull back in a big way, dragging many other stocks down with them.
“If the Dow slips,” Murphy said, “I think you’ll see people increase their short positions.”
Regional Short Selling
The table below lists the short interest in selected local stocks. In a short sale, an investor sells borrowed stock in the hope its price will drop, after which he can buy back the stock, return it to the lender and pocket the difference in price. Short interest is the number of shares borrowed for short sales and not yet repurchased.
Short interest Short interest Short Interest as % of total Stock at 6/15 at 4/15 % Change shares at 6/15 Amgen 2,046,582 1,702,876 +20% 1.5% Walt Disney 15,975,176 14,974,008* + 7% 3.1% Dole Food 377,964 214,357 +76% 0.6% Glenfed 3,601,146 3,438,505 +5% 10.5% Great Western 758,201 565,168 +34% 0.6% IHOP 883,383 765,298 +15% 9.9% Lockheed 401,216 425,619 -6% 0.6% Pac Rim Holding 539,015 619,423 -13% 5.7%
* Adjusted for stock split in May.
New York Stock Exchange, National Assn. of Securities Dealers
