Damn the Short Sellers; and more…

Observers of the rocketing price moves of now familiar names, are describing the phenomena as ‘insane’ but it was bound to happen eventually.  I’m just happy I’ve lived long enough to see some of these crooks get their comeuppance.  Is ‘crooks’ a harsh word to use?  Not in my opinion.  For most of my career as an investment portfolio manager I loathed the idea that it was even possible to sell short – i.e. an investor borrows shares and immediately sells them, hoping to buy them back later at a lower price, return them to the lender and pocket the difference.  For many companies out there defending their stock prices against short-sellers has been a futile exercise.

I often wondered why institutional fund managers didn’t long ago conspire to attack short-sellers in a similar fashion, but I suspect regulators would be all over them like dung beetles on poop if they did.  It appears social media and determined individual investors (motivated by greed rather than divine justice but so-be-it) have managed to do the job and make lots of money in the process.

I love this quote from MarketWatch:

“Even if you don’t buy the argument that these short squeezes are temporary phenomena and that the prices will normalize, consider this: Shares of GameStop closed at $347.51 on Jan. 27. The company is expected to show a loss for calendar 2021, but a profit of $1.22 a share in calendar 2022. The business has its challenges because so many videogames are now downloaded, rather than purchased at stores. The pandemic has also, of course, hurt sales. But if we look back 10 years, the company’s best earnings came in calendar 2015, when it earned $3.86 a share. Even if GameStop were to improve its earnings to that level, the stock would be trading at a price-to-earnings ratio of 90.”

A company’s valuation by investors should be a reflection of its real financial and economic circumstances (okay, color me naïve), not solely determined by unscrupulous trading activity – in either direction.  To date, the odds have favored the short-seller. But by aggressively forcing short–sellers to cover (a person with a short position must buy the shares, in this case to limit losses when the stock price unexpectedly goes up rather than down after being shorted) these gangs of young investors are giving short-sellers a taste of their own medicine.

Meanwhile, there are good things happening in sectors that are being completely ignored.  Despite the negative pressure on the energy patch caused by the current obsession with climate change, fundamentals continue to improve.

From the U.S. Energy Information Administration:

Energy prices have increased more than non-energy commodity prices on a percentage basis since October 2020.

Consider this from Joel Jackson, an analyst at BMO covering fertilizers and chemicals:

Name a fertilizer product – it’s likely rising this week (in some cases sizably). Fertilizer prices (mainly nitrogen and phosphate) have been surging on the back of continued strong crop prices, a long/strong fall season, and a strong expected northern hemisphere spring season.

Stocks like Suncor and Tourmaline (energy), Agrium (fertilizer) and Methanex have performed well for me, if lacking the rocket ship type charts of the names in the news, but its because their finances and economics are improving – yet the stocks are still cheap.  And how about those lumber stocks I suggested some time ago.