Shady Industries to Short (e.g., forprofit ed, payday loans, MLMs)

[robface]

I was curious if any of you guys have seen recent industries to analyze to short.

 

Previous ones that come to mind include:

 

- For profit education

 

- Pay day loans

 

- Multi-level Marketing companies

 

Any others?

[bz1516]

I look for shady companies to short, not necessarily whole industries.  My best short right now is STSI.  Probably on its way to zero.  RVLT is another good one.  LOCK has been a problem for me so far, but it fits right in there. I also look for catalysts that revolve around quarterly reports, rather than story stocks which can go on forever.

[Orange]

Obviously RTO's (foreign or domestic) are a good place to look.

 

Shorting cyclicals and counter-cyclicals can be extremely lucrative if you know when to short in the cycle, and have the wherewithal to hold on. But it can be dangerous. Puts are a better strategy since the moves in cyclicals are big and happen quickly. If you buy puts on a highly leveraged cyclical right before a recession, you can make a ton of money while hardly risking any capital.

 

Consumer staples are great to short during times when everyone is flocking to safety. They tend to be low vol, and the prices generally never get crazy. They are also easy to borrow, and often give you something to short during a recession.

 

There are a ton of obsolete industries where you can find stocks that are walking zombies. Companies that produce yellow pages (I own a large amount of puts on DXM, and have made money shorting them during their last 2 bankruptcies), newspaper companies, stocks with fad driven products, retailers that are getting permanently out competed, tech stocks with products no longer on the cutting edge, etc... Obviously not all stocks in these industries are losers, but you can certainly find some real gems.

[ItsAValueTrap]

These are the industries I would short:

 

- Junior mining.  The easiest companies to analyze are the companies that continue to operate their mine despite negative cash flow.  Those guys are charlatans.

- Independent oil and gas.

- Pharma.  Look for companies that spend more on G&A than research.

 

Those industries are magnets for fraud because you can lie to investors about the future economics of what you're doing without any consequences.  In junior mining, there are a lot of overly inflated technical reports.  In oil and gas, you have your ATPGs of the world with very high SEC PV-10 numbers (go read the ATPG thread here).  Nobody understands pharma.

 

2- I would not short MLM or companies like Herbalife.  They are extremely profitable.  For-profit education may be insanely profitable in the future.  Pay day loans can be extremely profitable.

 

3- Reverse mergers and SPACs (special purpose acquisition companies) tend to have very high levels of fraud.

 

With reverse mergers, it's kind of obvious why there are high levels of fraud.  Shady promoters who do pump and dumps will end up with lots of companies that go to 0.  Then they take these shell companies and sell them to people they know.  This explains why there is adverse selection.

 

With SPACs I have no idea.  But the level of fraud there is above average.

 

4- Another magnet for fraud is foreign companies.  Sometimes international law means that shareholders in certain ownership structures have no recourse against fraud.  So be careful about Chinese companies.  Legally foreigners aren't even allowed to own Chinese companies.

[jm25]

Interesting topic. I'm more interested in specific companies though. Provides a good hedge too.

[Palantir]

How about Royalty trusts? too many people plow into it for the dividends....but that could also  make shorting hard...

[blainehodder]

"Shady" is a hard thing to define. Be careful of hindsight bias.  Look at the following:

 

1) Guns

2) For Profit Ed

3) Cigarettes

4) Pharma

5) MLMs

6) Gov. Contractors

 

Notice what these candidates have in common? They are all found on the magic formula due to high returns on cap and being generally out of favour.  Be very careful shorting companies with low EV/EBIT, and high ROTC (particularly baskets of them). This could take you into negative academic alpha land.

 

Some might say the big banks are shady... What would have happened had you been short banks recent years?

 

Of course this demonstrates hindsight bias as well, but it is generally agreed upon that cheap + high returns on cap = good performance.

[jm25]

How about Royalty trusts? too many people plow into it for the dividends....but that could also  make shorting hard...

 

I agree - royalty trusts / MLPs that are paying out unsustainable dividends that are allowing them to maintain lofty valuations. Becomes expensive to short though with the yield.

[jay21]

Aleph blog had a great comment on shorting.  Many people think the opposite of being long is being short.  However, being short is the opposite of being levered long.

 

E.g. if you have a 4% short position and it goes against you by half, you are now at a 6% position, which is bigger in your portfolio.

 

http://alephblog.com/2014/01/28/on-position-sizing-in-equity-long-short-hedge-funds/

[Orange]

These are the industries I would short:

 

- Junior mining.  The easiest companies to analyze are the companies that continue to operate their mine despite negative cash flow.  Those guys are charlatans.

- Independent oil and gas.

- Pharma.  Look for companies that spend more on G&A than research.

 

Those industries are magnets for fraud because you can lie to investors about the future economics of what you're doing without any consequences.  In junior mining, there are a lot of overly inflated technical reports.  In oil and gas, you have your ATPGs of the world with very high SEC PV-10 numbers (go read the ATPG thread here).  Nobody understands pharma.

 

 

Those are all lottery ticket stocks. Shorting them is like fighting in a war; long periods of boredom followed by short bursts of utter terror. Just one new "discovery" will set your shorting career 3 moves backwards. The short squeezes are brutal, the operators are crafty crooks, and the shareholders are greed driven lemmings that will stick around FOREVER. Shareholders know a cash flow negative pharma or junior miner is a lottery ticket, and they will put up with years of bad results and unfulfilled promises if they still think the company will eventually strike it rich.

 

I would much rather short a struggling retailer, or a company whose product is on the verge of obsolescence. These stocks get worked out quickly, there is much more focus on short term results, and even if you are wrong you won't get annihilated like you will in a small pharmaceutical stock.

[ItsAValueTrap]

The cash flow negative operating mines probably won't end up in a ridiculous short squeeze.  Of course, any stock can turn into the next Volkswagen.

 

The independent oil and gas stocks tend not to see incredible price action.  I'm talking about the ones that are producing, not the development-stage ones with no production.

 

2- Yes the price action can be ridiculous.  Keep your position sizes really tiny lol...

 

3- Did I mention that any stock can turn into the next Volkswagen?

 

4- Of course there is the put option game.  Unfortunately very few of the small caps have liquid options markets.  I did buy ATPG puts once though...

 

But yes I largely agree with you.