I’ve always been intrigued by how seemingly small events can trigger sudden downturns in overvalued market sectors. In March of 2000, a Barron’s cover story did more than anything to accelerate the bursting of the dotcom bubble. Last week, a single tweet sparked a major selloff in biotechs and pharmaceuticals.
With his billion dollar battle royale against Herbalife entering its fourth year, Bill Ackman is starting to sound a bit punchy. Last week, during an Interview for Bloomberg TV, he likened short-selling to “brain damage” and declared “there are easier ways to make money.”
All I can say is: I feel your pain, Bill!
I don’t bet against powerful corporations with billions in market cap. By and large, the companies I short are beaten down and headed for bankruptcy. But the stocks of sickly firms can stay just as stubbornly high as Herbalife’s has, and they often spike higher for brief spurts even as their underlying businesses erode. Living through these rallies might not cause brain damage, but it’s definitely a major headache.
(note: this post originally appeared last Thursday on my Yahoo! Finance contributor page.)
Last week, a longstanding short in my fund released one of the grimmest quarterly reports I’ve seen in three decades of managing money. The company’s most important sales metric dropped at a double-digit rate, meaning its near-term revenues are going to be abysmal (after all, today’s sales are tomorrow’s revenues). Its long-term outlook isn’t great either because its most profitable product is fast becoming obsolete. Meanwhile, sales rates for new, less profitable products are modest and the business is hobbled by more than $2 billion in debt, all of which is coming due in less than two years. On the plus side, the company still generates a fair amount of cash, almost $400 million last year. Too bad interest payments to service its monstrous debt load were almost as large.
Declining sales, a sunsetting business model and crushing debt. If that isn’t a recipe for bankruptcy, I don’t know what is. Oh yeah, did I mention that this same company has already filed for Chapter 11 protection twice in the last decade?
I’d love to tell you the name of this business. Hell, I just wrote a book called Dead Companies Walking and this is probably the best example of a company heading for oblivion in the market today. But naming it would almost certainly wind up costing me and my investors a ton of money.