标题: Questions about Short Selling [打印本页] 作者: LiquidAssets10 时间: 2011-10-11 09:33 标题: Questions about Short Selling
Hi all, I have some questions about analyzing potential short positions and figured I would best use an example to describe how I'm thinking about it. The company is Tootsie Roll Industries (TR).
I've been looking into TR a bit further and noticed a short interest of 28.2 and shorts representing 11% of float. There is not a lot to be excited about with respect to this company fundamentally. The top-line growth has been basically stagnant since 2007, margins continue to decline, and the company has not shown much in the way of positive catalysts or new product launches. However, it still appears to trade at a slight premium to other publicly traded confectioners is because of its brand recognition -- your Average Joe investor doesn't care about financial statement analysis and only buys into the brand. Also, I presume there is a potential takeout premium embedded in share price, given there is some speculation that the Gordon family will look to sell to a strategic at some point. However I don't believe these "upside risks" outweigh my overall short thesis; obviously the one risk that could outweigh is if the markets turnaround, but then that would affect every company with positive beta.
How often do you guys see a short interest as high as what we see for TR, and how do you guys interpret it? What further diligence would I need to do to understand the risks of taking a short position in a company whose short interest is this high? Lastly, if your thesis were that the market could turnaround at some point, how would that impact your decision to take shorts if at all? I guess the simple answer is that it's an inherent risk to any short position, and since we're in the business of taking educated risks, maybe it's just one of those things that we hope we can "hedge" against with our long positions if the markets rebound. But, I want to make sure I'm thorough in thinking about upside risks on both an individual stock level and on a market-wide level.
Anyway, I'd appreciate comments from any of the more "experienced" investors on this forum -- AlphaSeeker, justin88, bchadwick and probably others I'm forgetting. Just trying to be thorough about understanding the risks of a short especially in a turbulent market.
P.S. I have read "Sell and Sell Short" by Alexander Elder and would highly recommend it to anyone looking to expand their knowledge of shorting. However, while I think that book focuses more on technical analysis and trading, I am hoping this thread focuses more on discussing fundamental risks to short positions. Of course, anyone who wants to take a look at TR through a technical lens, please share your thoughts by all means.作者: LBriscoe 时间: 2011-10-11 09:38
I also want to add that while I do look at technicals especially when assessing short positions, I want to ask: (1) how much credence would you give to technicals given the current markets we're in, and considering that TR's volume is very low relative to its market cap? (2) How might your view on using technical metrics for TR change based on whether you intended to hold your position for days vs. weeks vs. months?作者: Wendy01 时间: 2011-10-11 09:44
I'd say there might be M&A risk which would roast you.
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ChickenTikka Wrote:
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> Being Born Wealthy > Being Jewish or WASPY > Born
> Pretty > Top 5 MBA > CFA > Avg MBA > Born middle
> class > Born lower class > Born in crack house >
> Born middleclass in Asia and working in IT but
> looking to switch to buyside作者: NakedPuts00 时间: 2011-10-11 09:49
Alex Elder is good stuff.
I don't short individual companies very often, but if I were to do so, I would want to look at short interest relative to average daily volume. High short interest companies are prone to short squeezes, and if the interest is high relative to average volume, then those could be dramatic.
The other thing to be concerned about is that shorts tend to require more attentive rebalancing if you hold them for any length. As your shorts work, they become a smaller and smaller percentage of your portfolio exposure, and if they go against you, they become a larger and larger percentage of your portfolio exposure. This is just the opposite of a long position, and so if you are used to going long only, you may want to short in 1/2 or 2/3 the size you would be inclined do, until you get used to it.
If you are running a long-short portfolio, the rebalancing is especially important, or else you end up taking a lot more or less market risk than you expect.
As for technicals, I think this is a market where tecnhical analysis is particularly important, simply because the fundamentals are so difficult to fathom given the macro uncertainties that people end up having to rely on technical levels as the only way to try to get a handle on stuff.
For example, I've been trying to figure out what a fair value for the S&P 500 index would be. The answer is SO dependent on the assumptions (like is the market risk premium 4.9% or 5.0% - is the expected earnings growth rate 5.5% or 5.75%) that the fundamentals aren't much help. All we can do is say "well, people started feeling better around this level last time, maybe they'll mount a stand at this same level as we pass it again.".
Edited 1 time(s). Last edit at Wednesday, August 10, 2011 at 05:36PM by bchadwick.作者: dvilayphet 时间: 2011-10-11 09:55
Numi, great piece of M&I.
I don't short sell often. Most of my returns are though selling OTM puts or calls on ETFs, Indices, etc.
When I want to take a bearish view, I sell VXX puts in a leveraged way.作者: giants2010 时间: 2011-10-11 10:00
^ I like that VXX strategy. I didn't think of that. Neat!
Edited 1 time(s). Last edit at Wednesday, August 10, 2011 at 05:55PM by bchadwick.作者: Colum 时间: 2011-10-11 10:06
ASSet_MANagement Wrote:
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> I'd say there might be M&A risk which would roast
> you.
[have to run, but responding hastily...]
depending on your conviction for a takeout, you could buy an OTM call against your short to floor your downside. even if you don't, the price of these options (and skew) will give you some color as to the market's perceived likelihood of M&A activity happening (at what level and when).
agree with bchad about SI vs ADV; this is especially important if you're taking an outsized position.
also, how bad is the borrow? a lot of big funds/banks have an edge in locates which can give them an edge over you, so be careful. 作者: meghanjackson 时间: 2011-10-11 10:11
How does float compare to all shares outstanding? As noted, you need to look at Days Short Outstanding to get a better idea.
I mean, Tootsie Rolls are basically a consumer staple, right? Is there really a chance for a 30% correction in this thing? I use that as an approximate threshold for shorting because it ain't worth the risk for 5-10%.
One more thing I like to ask: "Is it a good or bad company?" Even if you think a stock is a bit overvalued (take AAPL), if it's a fantastic company with great products and management, don't bother shorting it. There are plenty of bad companies out there to short.作者: lucasg85 时间: 2011-10-11 10:17
AlphaSeeker Wrote:
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> Numi, great piece of M&I.
>
> I don't short sell often. Most of my returns are
> though selling OTM puts or calls on ETFs, Indices,
> etc.
>
> When I want to take a bearish view, I sell VXX
> puts in a leveraged way.
AlphaSeeker, interesting -- can you please elaborate on this strategy and how do you think about out-of-the-money / by how much / time to expiration?
Edited 2 time(s). Last edit at Thursday, August 11, 2011 at 10:01AM by numi.
