Red Flags for Shorting

Ricky Sperber & Juan F. NasserRicky Sperber & Juan F. Nasser

What is shorting?

You borrow 1000 shares from a brokerage houseYou borrow 1000 shares from a brokerage house Then you sell those shares at $20 per share:Then you sell those shares at $20 per share:

+ $20,000+ $20,000 The share price goes down to $8 per share The share price goes down to $8 per share You buy back those shares and return them to the You buy back those shares and return them to the

brokerage house:brokerage house:

- $8,000- $8,000 You have a profit of $12,000You have a profit of $12,000

Important Note!

Red flags are just an indicationRed flags are just an indication

Investigate furtherInvestigate further

Red Flags for Shorting

Bad Management

Who are they?Who are they? They don’t know about their businessThey don’t know about their business Sounds that they are on drugs!!!Sounds that they are on drugs!!! They’re more interested in their stock price They’re more interested in their stock price

than the company’s fundamental businessthan the company’s fundamental business Senior management wears more jewelry Senior management wears more jewelry

that your mother – The Street.comthat your mother – The Street.com

Few Barriers of Entry

Easy to gain market shareEasy to gain market share

Low entry costsLow entry costs

RiskyRisky

Bond Downgrade

Rating agencies downgrade a company’s bondRating agencies downgrade a company’s bond

More likely to defaultMore likely to default

Harder to raise fundsHarder to raise funds

Watch out for companies with a lot of debtWatch out for companies with a lot of debt

Wild Ass Projections

Too optimisticToo optimistic

Not coherent with industry trendsNot coherent with industry trends

Don’t reflect company’s historyDon’t reflect company’s history

New Business Model

Investors are driven by the excitement of a new Investors are driven by the excitement of a new business model business model

Bad News

Always in the press for bad newsAlways in the press for bad news

Changing Business Model

Constantly changing business modelConstantly changing business model

No competitive advantageNo competitive advantage

Risky Risky

ExpensiveExpensive

Waste of time and energyWaste of time and energy

Unusual Changes

Change in company’s nameChange in company’s name

Change in company’s accounting firmChange in company’s accounting firm

Company Playing Fool

Blaming it to the weatherBlaming it to the weather

Withholding vital informationWithholding vital information

Avoiding questionsAvoiding questions

Late in reportingLate in reporting

Referring to international sales Referring to international sales

Net Income vs. Cash Flows

Shows profits but has negative operating Shows profits but has negative operating cash flowscash flows

Increasing receivables collection period Increasing receivables collection period

Net Income vs. Cash Flows

W. T. Grant Co. Net Income and Cash Flows from Operations for Fiscal Years Ending Jan 31, 1966 to 1975

-200

-150

-100

-50

0

50

100

1966 1967 1968 1969 1970 1971 1972 1973 1974 1975

Mil

lio

ns

of

Do

lla

rs

Cash flows from operations

Net Income

Things not to do!

Don’t short good companies just because Don’t short good companies just because you think they’re overvaluedyou think they’re overvalued

If you can’t define a company’s business If you can’t define a company’s business don’t short itdon’t short it

Just because you wouldn’t buy it is not Just because you wouldn’t buy it is not enoughenough

Questions