Activist Short Seller Marc Cohodes Lives For “The Big Gotcha”

This article first appeared on Valuewalk.com

Marc Cohodes believes there is something wrong with him. “I have a genetic defect in my head. I see things that I think others don’t see,” he says.

Given that Cohodes is considered one of the great short sellers of the last several decades, this statement might come as a surprise. But Cohodes doesn’t fit the image of an elite money manager. For one thing, he only trades his own money. He’s been “retired” since 2008, when the hedge fund he worked at for 30 years shut down amidst the financial crisis. Since then, the 57-year-old has lived on his farm north of San Francisco raising chickens. He and his wife also take care of his 30-year-old son who has cerebral palsy and lives in a house built by Cohodes on the property.

But if you assume Cohodes spends his days pondering the finer points of gentleman farming, you’d be wrong. Because to hear him tell it, all he thinks about is shorting the stock of fraudulent companies. 

Value Walk recently spoke with Cohodes at his farm via telephone.

“My mind never sleeps,” he says. “I don’t have a restful mind. I have an inordinate amount of energy. I’m tireless in focus and I don’t give up...unless I’m wrong or I’m bored...short selling is always on my mind. And there’s no taking a break from it because to me it's just a gigantic puzzle. I’m always looking, hearing and thinking for the big gotcha.”

He goes on to say that, “I think people who are really into the short selling thing -- and there’s very few, even fewer who are really good at it -- have some form of derangement in the head. There’s something clearly wrong with you to do this. You have no friends. You have no natural helpers. You have everyone rooting against you. You have the market with a constant upward bias. Management hates you. You get sued. You get death threats. You’re not popular. You’re happy when everyone’s sad. I mean, you can go on and on and on…”


But despite his unconventional nature -- or more likely because of it -- he is an expert at sniffing out fraud. Marc Cohodes is an activist short seller -- he shorts (bets against) the stock of targeted companies, then he goes on the offensive, hoping to publicly unmask the fraud he discovered. And of course if things go right, he and his followers make tons of money in the process.

Whatever mental quirks Cohodes says he has, one thing’s for sure: In recent years Cohodes has had some remarkably successful short selling campaigns. He’s obviously made himself -- and those following his moves -- lots of money.

“I think people who are really into the short selling thing -- and there’s very few, even fewer who are really good at it -- have some form of derangement in the head. There’s something clearly wrong with you to do this.”

He began shorting Valeant (NYSE:VRX) in the summer of 2015 above $200. It now trades at $14. He shorted Concordia (NASDAQ:CXRX) in 2015 around 70. It now trades at $1.21. He first bet against Home Capital Group (TSE:HCG) around C$50 in late 2014. It hit C$5.85 earlier this year before rebounding to its recent price of about C$14. It definitely pays to follow Marc Cohode’s short selling campaigns.

One of his “big gotchas” came at the expense of former executives at the Canadian mortgage company Home Capital Group . Late in 2014, he began publicizing his view that the Canadian mortgage provider had lax underwriting and poor management. For many months Cohodes railed against HCG in the media and on Twitter, while the company – and many HCG supporters -- badmouthed him. But then in June of 2015, the company revealed it discovered that partner brokers had falsified the incomes of borrowers on about C$2 billion in mortgages.  The stock dropped over 40%.


But Cohodes had to wait a while for his Big Gotcha. Finally in April of this year, the Ontario Securities Commission announced that it determined company executives had misled investors about the extent of the mortgage fraud and levied penalties on HCG and its management. The stock tanked. By May of 2017, it was trading in single digits.

Cohodes says, “the highlight of my year was this rat bastard at Home Capital Group Gary Holloway at age 79 getting a four year officer and director ban from the Ontario Securities Commission. Which isn’t really the most aggressive bunch out there. As did the CEO. And the exciting part is they were fined $30 million and admitted guilt. So that kind of proves how right I was on this piece of ____.”

However recently there was a hiccup in Marc Cohodes ongoing short campaign against HCG. On June 21, Warren Buffett’s Berkshire Hathaway announced it was providing a C$2 billion loan to HCG and indirectly buying C$400 million of HCG shares via a private placement. HCG stock, which had reached a low of C$5.85 in May shot up to C$19, but have since settled back under C$14.

Nonetheless, Cohodes is sitting pat despite the Oracle of Omaha taking the other side of his trade. Cohodes notes that his short entry is significantly higher. And he says the stock would be much, much lower without Buffett’s high profile investment -- and is likely to still go there. Some view Buffett’s HCG bailout as more shrewd deal-making than a vote of confidence in Home Capital Group. The stock could trade significantly lower and Buffett would still make money.

In any case, Cohodes has since added two other Canadian shorts to his plate of short sales: Badger Daylighting (TSE:BAD) which he began shorting in April when the stock was in the C$30s (recently traded around C$25) andExchange Income Corp (TSE:EIF) which he announced on July 5 with the stock trading around C$31. The day we talked, Cohodes was energetically fixated on his latest target.

Exchange Income Corp runs a regional airline in Canada along with a “chop-shop” business, as Cohodes refers to it. “They buy used, obsolete -- whatever-- aircraft, chop them up and sell the parts.” EIF pays out a fat C$1.68 annual dividend per share, which equates to about a 6.25% yield at current prices.

The only problem, according to Cohodes, is that EIF has had negative cash flow “as far back as you can see. They burn cash. They don’t generate cash. And they don’t tell people the truth.”  Cohodes believes Exchange Income Corp essentially operates a Ponzi scheme.

 Source: S&P Capital IQ

Source: S&P Capital IQ

 

“They run a very dangerous airline in Manitoba and in parts of Ontario. They take advantage of First Nations people. They charge as much to go from Winnipeg to Red Sucker Lake Manitoba, which is about an hour flight, as Air Canada charges to fly from Winnipeg to London.

“The planes have crashed. People have died. There's numerous, numerous, numerous engine and maintenance issues. They use 30-year old and older aircraft. They have frequent cancellations. The old aircraft business is very cash-intensive because you have to spend so much on maintenance. Well, you cannot spend as much as they need to spend on maintenance properly and also pay a dividend...And frankly, if it wasn’t for the dividend, the stock would probably be 80% lower.”

“And all the Canadian sell side analysts love this thing, though they can’t explain it. They love it cause the company’s a great investment banking client for them. It’s a great client because the company has to keep raising money.”

Cohodes says that the headquarters of one of EIF’s subsidiaries, Regional 1, is located above a liquor store in Connecticut. “You can’t even make this ____ up,” he says. “And the guy who runs Regional 1, he’s been in various lawsuits. And in a deposition, he said he works a couple hours a day there.   And he owns 28 other companies at the same time. He views himself as a real estate developer. And if you do some simple math on EIF, this Regional 1 has a $1 billion dollar market cap. So this thing is like a joke...there’s nothing about this company that’s legitimate.

“But I've seen many of these type of setups over the years. They all end the same way, which is terribly. And these guys, the management here, is beyond weak, incompetent and promotional. I view this thing as fantastic. It’s just great. So I love this name.”


Is he predicting that EIF goes to zero? “I have three ratings,” he says: "L for lower; ML for much lower; or SL for significantly lower. I rate EIF SL. Can it go to zero? You bet your ass it can go to zero, or a very low number. Concordia went to $1.40, so that’s as good as zero.”

And Cohodes isn’t worried about a lack of short opportunities. “I’ve never seen as much fraud as there is now -- at least in my bailiwick, which is mid to small caps and lower.”

Why is that?

“I don’t know, maybe it’s just people letting go of the rope, thinking ‘who’s hurt by it:’ [fraud]. Some people think that nothing bad can happen when you rip people off or originate fraudulent mortgages. They think, ‘If housing still goes up, who’s bothered by it?’

“But fraud is fraud and security law is security law.  And if you have bad accounting and you cook your books and you make it up and you harm investors, I mean, I have a lot of emails from people who lost____-pots-full of money on a bunch of stuff.

“So I’m tenacious. I don’t quit. I can take an inordinate amount of pain. But if you’re fraudulent, I think I will outwork you, outthink you. I’ll ‘figure you out.”

If you commit fraud, and Marc Cohodes goes after you, expect that the day will come when he says ‘I gotcha.’

Mark Gaffney