Shorting shares has become increasingly difficult in the current long bull market, according to Regal Funds Management founder Phil King.
An experienced investor with a track record of short selling, King will be the only fund manager on the day tipping a short stock at the annual Australian Sohn Conference on Friday.
In the first Sohn Conference in 2016 he was one of three shorts pitching their ideas.
“It’s terribly tough to short shares in this bull market,” he said in an interview with the Australian ahead of the conference.
“This bull market is a much bigger bull market than many of the bull markets that we have seen. Many people who have tried to short have blown up.”
King cites the example of US video game company GameStop earlier this year.
When hedge funds decided to short the stock, retail investors, many of whom were roused to action by their presence on social media news aggregation platform Reddit, banded together and won.
But King still thinks short selling has a role in the current market.
“I’ve been shorting for 20 years. It’s more challenging now than it has been for a while, but there’s no doubt there’s going to be some great opportunities ahead.”
King will be tipping a well known Australian company for his short on Friday.
He believes that its shares are overvalued and it is in an industry which is changing, no longer as profitable as it once was.
“It’s been incredible over many years, but things have changed and now is the time to go short,” says King, who is careful not to reveal the stock itself.
“We’ve seen a lot of stocks bounce very aggressively from their lows last year.
“In some situations, they have bounced back too far. This is one of them.”
“It’s shares are overvalued. The world is changing and the future is going to be different to the past.”
In his last appearance at the Sohn conference, in 2019, King tipped ASX-listed health care equipment company PolyNovo as his short.
The company, which makes treatments for burns victims, defied his predictions, becoming a market darling in 2020 with its shares soaring to a high of $4 last December.
But investors have turned on the company this year and the company also saw the resignation of its chief executive Paul Brennan last month, with its shares crashing back to just over $1.40.
King founded Regal Funds Management in 2004 with his brother Andrew.
The two started investing for themselves but were soon approached by others to invest on their behalf.
The firm now has offices in Sydney and Singapore managing some $3bn, with a speciality in small and medium size companies.
While Andrew is retired, King says he is still enjoying himself running the business, riding the latest bull market.
“There’s been some tremendous opportunities out there. Some of the stocks are up 10 times on what we put in. It has been incredible.”
“There have been some themes which have worked well for us, like electrification.
“We have made a lot of money investing in electric vehicle stocks like (lithium miner) Pilbara (Minerals). We first bought its stock at around 35 cents and now it is trading above $2.50.”
Regal also bought Australian/US battery and electric car company Novonix, which counts former Dow Chemicals chief executive, Australian Andrew Liveris, as a director.
“We bought it at around 29c last and it is now almost $12.”
“There’s been incredible opportunities where we have made a lot of money.”
But shorting in this environment, he admits, has been difficult.
King did well shorting in the market uncertainty of the 2008 global financial crisis, but he says things are now very different.
One of the reasons has been a long period of low interest rates and easy money which means that companies with lots of debt can survive a lot longer than in the past.
“Some of the traditional red flags we have used for shorting aren’t working at the moment. Things like expensive valuations and weak balance sheets.”
King says that stocks can be given particularly high valuations when they become takeover opportunities.
With share prices so high, he says many companies are keen to use their prices for takeovers, citing the $39bn bid by US company Square for ASX listed payments company Afterpay in August in an all share deal.
With government bond yields so low, he argues that investors are now prepared to pay up more than they would have in the past for long term assets such as Sydney Airport.
He predicts that the market will continue to see more takeovers.
“The combination of low interest rates and some high share valuations mean that we are going to see a lot more corporate takeovers.”
As King knows from his own experience, shorting can have more challenges than going long.
Publicly advocating a short can lead to complaints from the company’s management who don’t like comments that their company’s share price is overvalued.
“It’s often hard to pick short ideas because management always take it personally which is always a challenge,” he says.
“But short ideas are more a reflection on valuations than anything else.”
In the US, high profile short sellers such as Wall Street fund manager, the high flying Bill Ackman, the chief executive of Pershing Square Capital, have been prepared to go public on their shorts, making speeches and presentations publicly attacking the company and outlining its shortcomings to help drive its share price down.
Ackman’s most famous play was US company Herbalife which he aggressively attacked for some five years.
But he was caught by others championing the company including Australian investor Bronte Capital’s John Hempton, finally admitting failure.
In Australia short sellers have circulated reports about companies they are shorting, with targets including financial journalists who are given an easy cheat sheets to attack a company.
The practice has attracted the attention of corporate regulator, the Australian Securities and Investments Commission (ASIC).
“Over the last five years, we have seen more of these short reports start to be issued,” King says.
“I think they are OK as long as they are fair and balanced and not personal.
“But when we start to see short reports making unsubstantiated claims we’ve got to be careful.”
King says the share market ecosystem is often biased to the long side, with analysts avoiding companies they don’t like and only issuing reports praising companies they do like.
While this is understandable, King argues that it means that there is a lack of independent research in the market about listed companies.
But King says if he reads a short report on a company he expects its writer to be shorting the stock.
“I expect someone who’s writing a short report to be short the stock, so I expect it to be biased.”
But King says it is not his practice to publicly attack a company, or privately brief journalists about a stock he is shorting, in an attempt to reduce its price.
“It’s not our style,” he says.
“We are happy to trust the market. But some people who are short like to promote their shorts to see if they can get their share price falling.”
King feels that the current share market is “a bit skittish”, as evident by its reaction to the news this week of a new Covid-19 variant, Omicron, and subsequent recovery.
He says the key thing for share markets in the current environment is not the fact that there could be a new Covid-19 virus but whether government’s lock down the economy which has a direct effect on the economy.
“It’s more the impact of the lockdown that the stock market’s worried about than the virus per se.”
King believes that there will be a good time for more shorting as in the future as the market turns.
“The best time for shorting is in bear markets, not in bull markets,” he says.
“We will have a bear market again- a true bear market, not a correction.
“Then I think there’ll be lots of opportunities for shorting.”
The annual Sohn conference started in New York in 1995 to commemorate the life of Ira Sohn, a Wall Street fund manager who died at the age of 29 from cancer.
A group of his fund manager friends decided to get together and sell tickets to a conference where they all tipped their favourite stock, to raise money for children’s cancer research.
The idea of the conference has spread around the world, with top fund managers tipping stocks to raise money for medical research.
This year’s conference in Australia, its second online as a result of Covid, will feature a video appearance by Warren Buffett’s colleague, 97 year old, Charlie Munger.
The Australian conferences have raised more than $30m for medical research since they started in 2016.
This article was originally posted by The Australian here.
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