- Due to valuations, easy money, and stalling momentum, Bill Martin — chairman and chief investment officer of Raging Capital Management — thinks the current economic environment is primed for short selling.
- He details some of his favorite current short picks, and explains his thinking behind the calls.
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If you’ve been short stocks in the last 10 years, your timing has been comparable to as a bear that hibernates all summer, and comes out of its den on the first day of winter. You were quite a ways off.
Easy money — bestowed upon markets by global central banks and largely responsible for boosting corporate earnings growth — has helped lift equities to a series of all-time highs. All the while, shorts were crushed.
But as global growth starts to slow down, earnings shrink, and optimism fades, a new era seems to be on the horizon — one that could be ripe wagers against stocks. And one chief investment officer thinks now is the time to seize the opportunity.
"I think we’ve had such an extended period of easy money that you’ve got, very frothy valuations, a lot of retail participation in the market, a lot of momentum participation in the market," said Bill Martin, chairman and CIO of Raging Capital Management, on The Meb Faber Show, an investing podcast. "Easy money creates supply and it creates competition."
He added: "We just think it’s a really, really ripe, attractive, opportunity set."
The points that Martin conveys above are hard to argue with, and are congruent with the telltale signs of a market that’s approaching the later stages of a cycle. Valuations are hovering above their historical norms, corporations are awash with debt from Federal Reserve QE, the IPO market is overflowing with companies that are losing billions, and momentum trades are starting to roll over.
Although there’s no way to accurately predict when the next recession or bear market will hit, Martin thinks the inefficiency of the short market — due to investors primarily focused on the long side — creates an omnipresent, compelling chance to generate some real returns.
"For every Facebook, there’s a long, long tail of companies that aren’t Facebook," he said. "We think that creates a really interesting opportunity set for creating a really diverse portfolio of these crappy, over-valued, fundamentally challenged companies."
Below are the companies he’s actively shorting. We’ve grouped them by themes.
Martin’s thesis for these two shorts comes down to the cornerstone of economics: Supply and demand.
"There has been a huge amount of new supply coming into these markets," he said. "We think there’s a good chance you see a tipping point, where new supply drives comps negative."
For the uninitiated, "comps" translates into comparables. Martin’s point is that the deluge of new storage supply on the market is going to start to affect same store sales, and in effect, drag revenue lower. As you would imagine, investors aren’t fond of less revenue.
In addition to falling comps, he touches on wage inflation, property taxes, and marketing inflation to bolster his view.
In a nutshell, what we have here is decreasing sales, and increasing costs. Martin thinks these stocks are going down.
"We basically think there’s a bubble in large size, expensive vehicles in the market," he said.
The price tag on these vehicles has widely outpaced wage inflation, making it increasingly more difficult for potential buyers to pull the trigger on a purchase. That’s not good news for Ford investors.
The 116-year-old company is discontinuing the production of the majority of their sedans. In turn, Ford will have to rely on sales from their larger, more expensive vehicles to keep their revenues afloat — the same vehicles where he sees bubbles forming.
Tesla is a similar story, but with it’s own idiosyncratic risks.
Martin points to the revolving door of high level executives, a negative margin shift, and budding competitors entering the fray. In addition, the company is yet to turn a profit, and is burning through cash at a torrid pace.
For these reasons, he thinks Tesla shares will be suppressed going forward. Currently about one-third of Tesla’s share float is being shorted, so he’s not alone in his thinking.
"We have a pretty good feeling how that movie is going to end," he concluded.
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