Speaking at the Stockbrokers and Investment Advisers Association (SIAA) 2023 conference, Anthony Aboud, portfolio manager at Perpetual, said that while he believes short selling reports have an undeserved negative reputation, they do have an effect on the market.
“I think that the logic suggests that a lot of them are market moving,” Mr Aboud said.
“They probably need to be done outside the market hours, I would suggest, to allow people to react or to allow the company to react.
“I think they get a bit of a bad rap. I think more damage is done when you buy than when you sell. If you buy badly, whether it be a company not as good as you like or a company too expensive, if you buy badly, there’s no coming back from that.”
He used the example of Redbubble, an ASX-listed online marketplace that has seen its share price fall 64 per cent over the last year as it slashed employee numbers in a bid to reach profit.
“Beginning of 2021, every analyst had a buy recommendation, $6.60 price target, the stock got to $6.80, even one analyst said: ‘Oh look, we think it’s cheap, it’s on an EV (enterprise value) to gross profit of 8.6 times’,” Mr Aboud said.
“Now, I put it to you that actually, people who were buying around that time would’ve loved to have had a short report out there, which actually gave another side to it. So, I think that more damage is done by consensus longs, than there is done by the short report.”
He added that with the stock now trading at 38 cents, that same analyst who had a buy recommendation priced at $6.60 has a price target of 45 cents, and that “it’s expensive at a 0.5 times EV to gross profit”.
“Now, I’m not trying to pick on people, I could name about another 10 examples like that, but the point is, bad short reports do get a bit of a bad rap,” Mr Aboud said.
“That’s not why people generally lose money, people generally lose money because they buy badly and everyone’s pushing in the same direction, everyone is saying the same thing. It doesn’t hurt to have another opinion. As a value investor, I love a bad short report.
“Yes, I think there needs to be some regulation. Yes, I do believe that they should be released outside market hours, but I do think they get a bad rap, too.”
Speaking more broadly about his methodology for identifying a short option, Mr Aboud said that the key is looking for red flags.
“We look for red flags. We look at the psychology of the management team because they tend to know, consciously or subconsciously, problems before the rest of market does,” he said.
“The big ones for me are insider selling, a big change in management … a strange acquisition — that’s a subjective thing — over promotional management. Another one is, obviously everyone looks at this, but aggressive accounting … but also then the cash generation.
“And the last one is when a company’s got a new thing every six months. Businesses don’t work like that, but every six months there is something completely different, something new, which they say is their core strategy.”
Mr Aboud added that it’s important for short sellers to have confidence in their analysis and remain transparent with clients.
“You know, you’ve got to have thick skin as a short seller because when markets are rally, your clients hate you,” he said.
“Stocks generally go up but when things are going down, you plan for everything, and you just never lie to them.”
