Despite Strong Bull Market, Many Activist Short Sellers Deliver Big Returns

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By Mark W. Gaffney on July 18, 2017  

Why would anyone choose Activist Short Seller as a profession?

“You have no friends; you have no natural helpers; everyone is rooting against you; the market’s upward bias is against you; management hates you; you get sued; you get death threats and you’re happy when everyone’s sad.”

This is how Marc Cohodes, former head of a billion dollar short selling hedge fund describes his profession in an interview with ValueWalk. Cohodes is now in semi-retirement, splitting time between running a chicken farm and placing high-profile short bets with his personal money. Both enterprises are reportedly doing very well.

Activist short sellers seek to unearth fraud, promotion schemes and other management deception at publicly traded companies. Once corrupt and overvalued companies are identified, the activist sells short the target company’s shares, betting prices will fall. The activist then goes public with allegations of impropriety via a scathingly accusatory research report. The shorted shares are hopefully bought back at a profit when and if the stock price collapses.

But Wall Street and main street has long viewed short-sellers as the stock market’s version of ambulance-chasing lawyers -- people who make a career profiting from others misfortune. The public perception is that when shorts are successful, people lose their jobs and investors lose their retirement savings; meanwhile the short-seller who profited from the stock's decline is seen as laughing all the way to the bank.

Never mind that many studies have concluded that short-selling is not a detriment to freely traded stock markets, and actually provides benefits by targeting overvalued companies. Still, if you want to be popular, activist short selling is not the way to do it. As Cohodes puts it: “I think people who are really into the short-selling thing -- and there are very few and even fewer who are really good at it -- have to be deranged in the head. I mean there’s something clearly wrong with you to do this.”

Activist short-sellers however see themselves as the good guys. Like investigative reporters and corporate whistleblowers, activist short-sellers believe they benefit society by doing the work that regulators are often unable or unwilling to do -- protecting the innocent shareholder by uncovering fraud and deception, and holding crooks feet to the fire.

But altruism aside, there is another reason to be an activist short-seller: You can make a lot of money. And investors who copy activists short selling moves can also reap big profits.

Best Activist short-sellers ranked

Activist Shorts is a database that tracks activist short-sellers, which it defines as “investors who take short positions in stocks and publicly promote their positions.” Activist Shorts computes the performance a “follower” of a short-selling campaign might attain by shorting the stock after a public short announcement and covering a year later or when the activist says the short position is closed.

While there’s over 100 activist short sellers in its database, 59 entities are considered frequent or “top activists”, defined as having at least three short-selling campaigns since 2013 and at least one over the last twelve months.

Of these 59 frequent activist short sellers, 24 have averaged annual performance less than -15%. (Remember, this is short-selling and NEGATIVE = PROFITABLE). This is impressive considering that the short-selling performance was during a strong bull market, when equities were relentlessly buoyed by optimistic investors. The top ten performers in the Activist Shorts database had an average campaign return of -38.28%.

Here are the top five performing activist short sellers based on campaign returns, according to Activist Shorts:

NameAverage campaign-length return:Average
one-year return:Average
one-year return vs. S&P:No. of campaigns    -53.90%  average over 6 campaigns

Gotham City Research   -52.10% over 9 campaigns   

Bleecker Street Research  -52.10% over 17 campaigns

Volmanac . -41.90% over 5 campaigns

Pump Stopper . -39.10% over 24 campaigns

Source: Activist Shorts

The best performing activist short-seller is, founded by Manuel P. Asensio in 1992. His firm boasts an average campaign-length return of -53.90%. Activist Shorts only tracks the firm’s record since 2009, but Asensio has had dozens of highly successful short-selling campaigns going back to the late 90’s.

A Cuban immigrant, Manuel Asensio received his undergraduate degree at the Wharton School of Business and his MBA at Harvard Business School. He began his career at Bear Stearns in mergers and acquisitions in 1986, alongside noted hedge fund manager John Paulson, who later worked at Asensio’s firm. In 1993 Asensio & Company, Inc., became the first FINRA- and SEC-registered brokerage firm dedicated to short-focused research and trading. began distributing short-selling research online in 1996, making it the first website to be exclusively focused on distributing original short-selling ideas.

A 2014 study by the National Bureau of Economic Research described him as the “pioneer” of “short-selling arbitrage.”

Number two on the list is Gotham City Research, founded by the reclusive Daniel Yu. The activist’s most astounding campaign was the takedown of Let’s Gowex SA, a Spanish tech company. On July 1 of 2014, Gotham City Research posted a report alleging that 90% of the company’s revenue was nonexistent, and it’s soaring stock worthless.

Gowex filed for bankruptcy less than one week after its Chairman and CEO admitted that accounting statements for at least the past four years were not a “faithful image” of the company’s performance.

Bleecker Street Research, the third best activist short-selling performer, has been posting research publicly on Seeking Alpha since 2013 and on its own website since 2015. It publishes both long and short ideas.

Its founder, Chris Drose published on Seeking Alpha under his own name in 2013 and early 2014 before publishing under Bleecker Street Research in mid-2014. He gained fame in 2015, when his research report describing undisclosed deaths at AAC Holdings, Inc. (NYSE:AAC) caused the stock to drop 50% the next day. At the time Drose was reportedly a 21-year-old college student majoring in economics and English.

Number four on the list is Volmanac Research. Volmanac is a fundamental / value investor that utilizes public and third-party data combined with proprietary data collection and aggregation strategies to monitor and deploy capital.

The firm has issued five reports since 2016, the most dramatic an August 21, 2016 report that valued GEVO Inc. (Nasdaq: GEVO) at less than $0.01. At the time GEVO was trading at about $10.50. Volmanac stated that the company could restructure or file for bankruptcy within three weeks. GEVO now trades for $0.58.

In the number five spot for top performing activist short-sellers is Pump Stopper. The Pump Stopper is an anonymous entity that publishes its research at Seeking Alpha and its own website. It describes itself as working to "unplug the drain so capital can flow to the good guys" and says it focuses on small and mid-sized companies. It has been posting publicly since April 2014.

On 12-21-15 Pump Stopper published a report on MagneGas Corporation (Nasdaq:MNGA) stating that the company, then trading around $15.00, was a “Strong sell on opaque offshore entities, insider enrichment and paid stock promotion with -92.9%” downside. A year later MNGA was under $5 and it now trades for $1.30. According to Activist Shorts, Pump Stopper has not initiated a short-selling campaign since MagneGas. ValueWalk was in touch with Pump Stopper, but the last email sent to them bounced and no trace of the entity remains...

Shorting stocks in a bull market can be risky even for professionals, but possibly the good performance produced by many activist short sellers should not come as a surprise. Emboldened by ever-rising prices, equity investors often throw caution to the wind during good times. Stock prices often decouple from real world valuations. This is a fertile playing field for activist short sellers.

Indeed, Marc Cohodes says “I’ve never seen this much fraud in my career, at least in my bailiwick which is mid to small caps and lower.” Lately Cohodes says he’s been finding some of the worst practices among certain public Canadian companies.

He shorted Concordia Int’l Corp. (Nasdaq: CSRX) at 85 in 2015 calling it “a poor man’s Valeant.” It now trades under $2. Home Capital (TSE: HCG), Badger Daylighting (TSE:BAD) and his most recent short, Exchange Income (TSE: EIF) all are Canadian companies in Cohodes crosshairs. He calls EIF a “charade and a gimmick.”

If Cohodes is right, the environment for activist short selling is good and getting better. Investors looking for a hedge amidst inexorably rising stock prices may want to pay attention.

In the coming weeks, ValueWalk will be profiling many of the world’s top activist short-sellers, and their best short ideas. Stay tuned.


Mark Gaffney