Apple CEO Tim Cook (AFP/Getty Images via @daylife)
Frankly, I don't understand Carl Icahn’s going public with his billion plus gut play in
In the old days of Wall Street activism, the smartest players were the "no comment" ones, who only talked to each other. Market letter writers wore their many picks on their rolled-up sleeves.
Let's take Apple as a case study. First off, I don't like buying stocks at $500 a share even if they hold a boodle of cash on their balance sheet. After all, Polaroid and
Apple ain’t going out of business - at least for the next 5 or 10 years, but its new toys don't resonate with me. Samsung, the same. Many users prefer their older Galaxy S III to the new Galaxy S 4. I’m agnostic on this issue, unentitled to an opinion because I'm still using Apple's initial iPhone.
Apple may sell at 10 times earnings because competitive forces won't let up. I'm seeing earnings estimates shading below $40 a share forward 12 months. If on the money, Apple is a $400 piece of paper. Its board should consider its cash hoard as a safety net. Maybe Apple should diversify and buy General Motors at 3.1 times next year’s enterprise value to EBITDA. It's accretive even at 4 times enterprise value.
Curiously, no extreme short positions surface in controversial stocks like Apple, Salesforce.com, Gilead Sciences, Citigroup and JPMorgan Chase. Shorting stocks with high price-earnings ratios doesn't work unless their earnings numbers at the margin disappoint.
If you believe Apple is the next Polaroid, short a bunch but understand even if Apple's earnings decline 10% next 12 months, the stock probably doesn't break below $400 unless they lose share of market in smartphones. Apple has sufficient liquidity to keep it going for the next 10 years.
The analyst fraternity frets uneasily over Apple's earnings trajectory, in no-man’s land on forward revenues and some erosion in gross margins. Icahn's gut call on the stock’s undervaluation could turn into cowboy arithmetic. The next 12 months tell whether he gets the lady or the tiger.
Etched into my psyche is short selling is not my game. But, I learn some about who's doing what to whom, surfing down the list of stocks where short sales are an outsized percentage of the stock’s float.
Decades ago, when I’d breakfast with Larry Tisch in his Regency Hotel on Park Avenue, Larry would rant about this one and that one that had to be headed south. Tisch was an avid reader of financial reports, particularly 10-Q’s and 10-K’s where corporations had to reveal more details than in their slick annual reports replete with 4-color photos. Accounting legerdemain lasts only so long.
Then there was Bob Wilson who ran hedge fund money in the sixties and seventies. Bob shorted Resorts International, the initial gaming casino licensed in Atlantic City. The concept was simple. Their monopoly wouldn't last very long. Wilson would quip "If you spend more than 15 minutes researching a short it's no good.”
While it lasted (more than a year) Resorts coined money in its shabby grind joint, a converted nondescript edifice. But, its crap tables were mobbed six deep and Resort’s EBITDA ratio to revenues soared over 40%, a metric rarely seen in Las Vegas but still shining in the Las Vegas Sands property in Macau.
Resorts, as a stock broke par before crapping out years later. Wilson, I remember, was on a worldwide jaunt and shorted more on his city stops. Big short operators’ veins are pure ice water, but I'm not sure whether Wilson came out whole from his Resorts caper.
I take the other side of infinity. After all, a short only can make you 100% on invested capital, but buying a ragamuffin for a dollar can take you to the moon. Some examples over the past five years: Citigroup, Sirius XM Radio and U. S. Airways.
I agree with Wilson that shorting calls for a visceral reaction, except I take the reciprocal side of the equation. If only my doggie stays in business, I'm at least whole. Come-back! Come-back!
The spread of the short interest on the Big Board by sectors actually surprised me. It's pretty uniform in the sense that almost all sectors of the market carry comparable short interest ratios averaging around 7%.
The consumer discretionary sector tops the list at 7.9% along with financials. This is understandable because high quality consumer stocks sell at rich multiples of earnings. As for the banks, who knows?
Morgan now needs to add a couple of billion to litigation reserves and must spend more billions to assume believable self regulation of its empire. Normally, I take the other side of headline risk. In the Whale caper it paid off. JPMorgan Chase lost $40 billion in market value on its $6 billion trading loss. The Street obviously overreacted.
Only when you dig into the 100 biggest short positions on the Big Board relative to their float can you sort out what short sellers love to hate. But, first, I had very slim pickings on name recognition in this listing.
Some examples: Blyth, Silver Springs Networks, h.h.gregg, GenCorp., U.S. Silica Holdings, Miller Energy Resources, Western Refining, InvenSence, Fusion-io, Polypore International and so on. Who speaks for these ragamuffins and what do they do wrong to draw so hostile a crowd?
There are some recognizables like J.C. Penny, Herbalife, U.S. Steel, Radian Group, Pitney Bowes and Barnes & Noble. Two of my longs make this list, namely Radian and Walter Energy. I'm far ahead long on these doggies but maybe not forever.
Shorting is not the most popular sport in the country considering the S&P 500 Index is ahead over 22%. Short interest, around 12 billion shares or $400 billion, amounts to little more than 3 days of volume on the Big Board.
Leverage is still a dirty word. Few players fully margin their accounts. This isn't 1929 when shoe shine boys bought stocks on 10% margin. Maybe hedge funds are fully margined but their net long position averages little over 50%. Performance has suffered with most large hedgies ahead 10% or so year-to-date.
The only margin excesses the past seven years took place in mortgages for single-family homes bought on speculation and then packaged by banks as mortgage backed securities. Margin debt outstanding relative to the Big Board’s market value is an insignificant number. Considering margin interest rates key off LIBOR, this surprises me. I borrow at 70 basis points, not 10% like in the good old days when every cream puff rated himself as a good operator.
When I scan down the list of shorts with very high percentages of their outstanding float there are no great surprises. Home builders and natural resource properties stick in the dog house. Beazer Homes, Hovnanian Enterprises, Molycorp and Walter Energy are sandwiched between J.C. Penney and Herbalife.
Alpha Natural Resources, a coal property, carries an enormous amount of debt relative to equity at market value. This invokes Mike Milken’s MAD ratio. If the market value of a company's debt greatly exceeds the market value of its equity it is not a good candidate for refinancing. Arch Coal and Walter Energy fit this construct, too.
I see several fundamental shorts in the media sector, mainly newspaper chains like The New York Times and McClatchy. I agree here. Shorts in Radian must believe escalating mortgage rates impact new home starts; I'm long because I believe new home starts, currently around 700,000, rest little more than half the normalized level for the country. History is on my side.
Fortunes are made going long America's fastest growing companies as in Apple five years ago. I haven't heard about any great short sellers who have gone to the moon, yesterday or today.
Sosnoff owns personally and / or Atalanta Sosnoff Capital, LLC owns for clients the following investments cited in this commentary: General Motors, Salesforce.com, Gilead Sciences, Citigroup, JPMorgan Chase, Las Vegas Sands, Sirius XM Radio, Radian Group and Walter Energy.
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