What Short Sellers, the Voting and Weighing Machine are Offering Investors Today

KCR’s data-driven and historically informed process helps us avoid bubbles, find mispriced quality, and identify stocks that are simply too cheap.  Over the long arc of time, investors’ reliable penchant for following the herd and ricocheting from greed to fear at precisely the wrong moments affords disciplined investors the opportunity to compound wealth at higher rates with far lower chances of permanent impairments.

Short sellers have been ridden out on a rail.  First, through the combination of free money and a speculative mania that, by many measures, eclipsed the dot.com bubble. Now, those same folks have come under regulatory attack post the short squeeze chaos around GameStop.  Suddenly short interest data, short positions, and the number of shares sold short at various issuers have become an issue of public interest.

As Barron’s explained, some short sellers allegedly engaged in the practice of publishing bearish research on a stock and then covering as their reports sent the stocks lower.  KCR can see how that would draw the ire of both investors and regulators alike.  What’s less clear to us is why the same behavior by prominent long-investors doesn’t stimulate the same upset and regulatory inquiries.

Netflix Short Interest Troughs Post Recent Price Declines

We are left to wonder if this lopsided regulatory push is merely amplifying already prominent behavioral errors.  Inefficient markets combined with an ever-growing affinity for indexing have possibly, increased the human tendency to “anchor” on things that have no relationship with intrinsic value.

The chart below shows the stock price and short interest in Netflix since 2011. On the one hand, with the stock price down -65% since the peak in October of 2021, a reduction in short interest is to be expected.  On the other hand, …

Netflix Stock Price LHS and Short Interest RHS

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…. just because a mania darling was valued at $300bn at the peak does not mean that the company’s current $110 billion market cap makes it cheap.

The chart below is the same as the chart above, with one difference that completely changes the story.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

September 23, 2022 |

Categories: Quick Takes

September 23, 2022

Categories: Quick Takes

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