New short position: UAUA

With the Nasdaq near a 14-month high, and the VIX near a 14-month low, I have been building a basket of out-of-the-market puts on financially-distressed stocks drawn from Short Screen's screener¹. Today's addition to this basket are the $6 strike, JUN 10 puts on United Airlines parent UAL Corporation (Nasdaq: UAUA), UALRK.X. I bought a few of these today at $0.40.

Warren Buffett famously noted how awful airline stocks have long been as investments, quipping,

I like to think that if I'd been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough--I owed this to future capitalists--to shoot him down. I mean, Karl Marx couldn't have done as much damage to capitalists as Orville did.

Despite Buffett's old admonition, investors have bid up shares of UAL to more than four times their low for the year in June. Like those of many risky companies, shares of UAL have been buoyed by the liquidity-fueled rally this year, despite having persistently weak fundamentals. In addition to having an Altman Z"-score of approximately -2.1, according to Short Screen's calculator (scores below 1.1 indicate distress, according to the model), UAL has lost money in three of its last four quarters, and has a current ratio of approximately .68, indicating that its debt burden is a near-term challenge as well as a longer-term one. Over the last year, according to Nasdaq, there have been 7 insider sales and no insider buys. I expect shares of UAL to decline when the euphoria of the current market rally fades and reality sets in again.


¹For those unfamiliar with it, Short Screen's screener uses the Altman Z-score model (for manufacturing companies) and the Altman Z"-score model (for non-manufacturing companies) to rank stocks according to their level of financial distress. In its initial test, the Altman Z-Score was found to be 72% accurate in predicting bankruptcy two years prior to the event, with a Type II error of 6%. In a series of subsequent tests covering three different time periods over the next 31 years, the model was found to be approximately 80-90% accurate in predicting bankruptcy one year prior to the event, with a Type II error of approximately 15-20%. For more detail on the models, and on how Short Screen's screener works, please see here.

VMED Update

Apparently, I'm not the only one who decided to bet against VMED recently. Short interest on VMED spiked 43% in the first two weeks of December.

Sold the rest of those GLD puts

In a post earlier this month ("Buying a lottery ticket to bet against gold") I mentioned buying a few puts on the gold ETF GLD. Those puts I bought were the Jan 10s with a strike price of 108, GCZMD.X. I got them at $0.74. I sold half on 12/11 at $2.92 for a gain of about 390%. Today I sold the rest at $3.20, for a gain of about 430%. I'd send Buffetteer17 a nice bottle of scotch if I knew his address.

Bought Puts on Virgin Media

Virgin Media (Nasdaq: VMED) caught my eye on the Short Screen screener last night. In addition to having an Altman Z"-Score in the distress zone, the company has been losing money for the last four quarters (though those losses have narrowed somewhat over the last three), and has a fairly high debt load (about $9.5 billion in net debt, versus trailing revenue of $6.6 billion and a market cap of about $5.5 billion). Despite that, its share price has rocketed up from a low of $3.76 back in March, to $17 as of last night's close¹. A quick search on Twitter showed several bullish tweets on the stock over the last few days, based on its technical trends.

Since Virgin Media has options traded on it, I figured I'd buy puts on it instead of shorting it to cap my downside risk. I bought a few of the Jun 10 put contracts with a $10 strike price (NUDRB.X) this morning for 30 cents each.

¹The shares of a number of financially distressed companies have had similarly explosive run-ups from their March lows, including one we mentioned here previously, BAGL.

Update: Perennial contrarian "Commodity" makes the bullish case for VMED in this comment thread on GuruFocus. He could be right, so if you're thinking of going long or short VMED, you may want to check out his comments first.

Update on that bet against gold

In a post last Thursday ("Buying a lottery ticket to bet against gold") I mentioned buying a few puts on the gold ETF GLD. Those puts I bought were the Jan 10s with a strike price of 108, GCZMD.X. I got them at $0.74 and they closed yesterday at $2.65, so they're up about 350% since last Thursday. So far, so good for Buffetteer17's idea. When to sell is another question.

A brief word from our sponsor

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Short Screen offers tools and ideas for short sellers, including a screener that pulls up companies predicted to go bankrupt by their Altman Z-scores. Here is a link to a third party review of the site, Screening Stocks for Short Selling. Here is a link to a post dealing with some common questions about short selling and risk.

John Chow on Short Screen and Tim Sykes

John Chow on Short Screen and Tim Sykes, as resources for investors looking to short stocks: "Going Long on Going Short".

Covered short of a David Einhorn stock for 27% profit in less than two months.

On September 17th, I mentioned that I had shorted one of David Einhorn's holdings, Einstein Noah Restaurant Group (Nasdaq: BAGL), at $13.78. I found BAGL initially using ShortScreen's screener: at the time, it was one of the 50 most-distressed stocks trading at $10 or above. Earlier today I covered my short position at $10.05, for a 27% profit in less than two months.

If you had followed me on this particular trade but shorted only 100 shares, your capital gain would have paid for an annual membership to ShortScreen more than twice over.

Ill-equipped to act, with insufficient tact

This didn't last long. On the advice of one of my developers I deviated from the personalized tweeting and sent the same reply to 20 or so folks on Twitter yesterday. I searched for people tweeting about short selling and then suggested they might want to check out shortscreen for other short ideas. In fairness to my developer, he didn't suggest to do that, exactly: he suggested to tweet a handful of folks at once. In any case, my Twitter account has been suspended, which frankly surprised me.

Judging from 100% of the tweets I received from 30 individuals over my few days-long Twitter career, my tweets were better targeted and more relevant than pretty much any of them. For example, unlike the fellow who managed to send me -- someone hasn't golfed in maybe four years and has a set of Costco clubs gathering dust somewhere -- 20 links to golf tips in two days, I only contacted actual short sellers about a site geared to short selling. That's not to suggest that all of the tweets I received in the last few days were commercial in nature: some were just inane bits of trivia, e.g., the one from a woman in the Southwest who mentioned that she had moved that day and asked if anyone else liked moving.

I appealed for clemency to the powers that tweet, noting that after reading the TOS I understood my mistake. The form for contacting Twitter about stuff like this includes a field asking "how do you feel"¹. I entered "chastened". But I am of two minds about this. On the one hand, the ratio of visits to Shortscreen from Twitter to my tweets was pretty high -- about 50%. On the other hand, the whole Twitter enterprise seems like a pointless time suck. So I leave it to the folks at Twitter to decide if my tweeting days are over. If they are, so be it.


¹This question reminded me a little of that test the reincarnated Spock takes at his parents' house on Vulcan in Star Trek IV. He gets a series of questions, one of which goes like this, if memory serves, "Adjust the sine wave of the magnetic envelope so that anti-gravitons can enter and anti-protons cannot". And then he is stumped by the last question, "How do you feel?".

Hedging

Took advantage of the up day today to pick up a few more DIA puts. I'm working on a more precise hedging strategy, but these should suffice in the meantime. Hedging plus shorting)
so I'm not swimming naked when the tide goes out.

New site

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A few of you have already seen the demo version of this site, but the live version of it is up now: ShortScreen.com. This site features an automated calculator and a screener based on the Altman models. With the calculator, all you need to do is enter a stock symbol, and the calculator will instantly give you that company's Altman Z-score, or Altman Z"-score, if it's a non-manufacturing company.

The screener runs the Altman Z-Score model on all of the manufacturing stocks in the site's database, and the Altman Z"-Score on all the non-manufacturing stocks. You can pick a minimum share price and then see a list of the 50 most distressed stocks at or above that share price, out of the universe of roughly 3,000 stocks in the site's database. You'll find a couple of the short positions I've mentioned previously on this blog among the 50 most distressed stocks at or above $9 per share.

If, like me, you think it's prudent to include some short positions in your portfolio, perhaps you will agree that a list of stocks that the Altman models predict are headed for bankruptcy might be worth considering as potential candidates for short selling (or buying puts on them, if the particular stocks have options).

The site also has a message board system with a couple of unique features. The first is that, unlike other stock message boards, there will be no bias against skeptical or bearish comments. If you've ever posted one of those on a typical message board, you probably noticed that it quickly got deleted. That makes it tough to find a balanced discussion about any stocks.

The other unique feature is the premium ranking system. Premium members will have the authority to rank comments on a scale from one to five stars. Comments that have an average rank of less than two stars after several votes will be deleted, and the highest-ranked comments will move to the top. Although non-paying registered users and paying premium members will both be able to post on the message boards, the site limits the ranking authority to premium members to discourage anyone from creating multiple accounts in order to manipulate the ranking system (which is pretty common, unfortunately, on Yahoo's message boards).

Premium members will also have the opportunity to become affiliates, and get paid to refer other premium members to the site. When you become an affiliate, you'll get a unique bit of HTML code for an affiliate badge that you can copy and paste onto your site. When you do, it will look like this:



When visitors click on your affiliate badge, they'll go to a special version of the Shortscreen sign-up page where they will get a 5% discount off of the regular membership rate, and your affiliate account will be credited with the referral.

The image above was one of the later preliminary sketches by my logo designer. At that point we were refining the steepness of the hump of the bear's withers. I wanted it to be steep to connote aggression, but when it got too steep it looked too wolf-like.

New Short Position: KITD

In a post last year, I recommended a documentary from 2001 that was airing on Showtime again, Startup.com, which profiled the rise and fall of a dot-com called govWorks.com. A post on Fred Wilson's blog yesterday (NYC's BigApps Challenge) reminded me of one of the stars of Startup.com, Kaleil Isaza Tuzman (pictured above), the co-founder of govWorks.com. When I found through a quick Internet search that Tuzman was now the CEO of a public company (KIT digital Inc.; Nasdaq: KITD), I figured it might me a good candidate to sell short, so I ran the Altman Z"-Score on it. Its score was -4.17. Recall that a score below 1.1 indicates a high risk of bankruptcy. On the other hand, the financial data that score is based on doesn't take into account two recent acquisitions made by the company, which the company's management claims will be accretive, so bear that in mind.

I shorted this at $11.55 today.

The photo above of Mr. Tuzman is from KIT digital Inc.'s website.

Update: readers of this post may also be interested in this site, which offers tools and ideas for short sellers and includes an automated calculator and screener based on the Altman models: Shortscreen.com

New Short Position: BAGL

I mentioned this in a previous comment thread, but I shorted a few shares of Einstein Noah Restaurant Group (Nasdaq: BAGL) earlier today at $13.78. This company has an Altman Z"-Score¹ of -3.2. A score below 1.1 suggests a company is at risk of bankruptcy within 1 to 2 years. It wouldn't be the first time an Einstein Bagels went bankrupt; a previous iteration of Einstein/Noah Bagels went bankrupt nine years ago. Insiders have been selling BAGL this year. The company also has negative working capital, over $117 million in total debt, less than $4 million in cash, and it's had a big run-up this year that doesn't seem to be justified by fundamentals.

On the other hand, David Einhorn, one of The Guru Five, is the largest investor in BAGL², so bear that in mind. For my part though, I'm not going to let a guru's ownership of a stock keep me from shorting it. I did that last year, when I was bearish on USG, but didn't short it because Warren Buffett owned it. These guys put their pants on one leg at a time like the rest of us, and they often have different considerations than the rest of us do with these sorts of positions.


¹Z"-Score is the designation for the modified, four-term version of the model recommended for publicly-traded (non-financial) non-manufacturing companies.

²Einhorn appears to have acquired his stake when he helped recapitalize the company after its bankruptcy, so his average cost here is probably very low. I don't have the energy to look up the exact figures, but feel free to do so yourself if the spirit moves you.

Katsenelson's Secular Range-Bound Market Thesis Updated

Below is a presentation of Vitaliy Katsenelson's secular range-bound market thesis, updated as of this month (longtime readers may recall I linked to an earlier version of this last year). It's worth taking a few minutes to scroll through this. I think Katsenelson is right in his diagnosis, and his prescriptions (slide 29) seem reasonable, for the most part, but for me the raise a question: why be net long at all, if we are in a secular bear or range-bound market? Why not be market-neutral¹ or even net short?

Avi Presentation

¹I'm adding this footnote on 12/30/09. After I wrote the post above, I found a professional investor who had the same idea ten years ago, and has produced some impressive returns since then: Marc Mayor of Inside ALPHA. I found out about Mayor when he joined Short Screen as a premium member earlier this month.

More on the Strongest and Weakest Banks in America

In a post last August, "The Strongest and Weakest Banks in America" (which, according to Feedjit, still attracts a number of readers), we mentioned the "X-List Report" which ranked the financial strength of banks and thrifts from "A" to "E". Another ranking system of American banks and credit unions, drawn in part from data in bank reports to government regulators, is offered by Bauer Financial. Bauer Financial charges for its detailed reports on each institution, but it lists their star rankings at no charge. Those star rankings range from 5 stars ("superior") to no stars (presumably worse than "troubled", which is Bauer's description for 1 star banks). You can look up a particular bank, or see a ranked list of all banks and credit unions by state here.

"Ten Financial Entities on the Brink"

Mike Shedlock ("Mish") actually lists eleven financial entities on the brink in this post. One of them, Downey Financial (NYSE: DSL) is one of the banks we listed in a recent post, "The Strongest and Weakest Banks in America".

The Strongest and Weakest Banks in America

Hat tip to Barry Ritholtz for this The "X"-List Report" (PDF) on the strongest and weakest banks in America. The list draws on data from the FDIC's Call Reports and the Office of Thrift Supervision's Thrift Financial Reports to rank banks and thrifts from strongest ("A") to weakest ("E"). Some of the "weak" ("D") and "very weak" ("E") banks are publicly traded, and could be candidates for selling short. Another idea might be a paired trade going short one of the weakest banks and going long one of the strongest. I haven't looked into these in detail yet, but here are the symbols of some of the "weak" and "very weak" publicly traded banks on this list, including one that's already in bankruptcy:

FCEN.OB

BCBF.OB

FMNTQ.PK

DSL

FDT

FLCM.OB

ITYC.PK