Ignore the Hype, Advises Top Short Seller
Gamblers who play craps are familiar with the don't pass bet. Players who put their money on this bet are known as wrong players since they are usually betting against the shooter, who is a right player. Essentially, the wrong player is betting with the house, which wants to see the right players lose.
A first cousin to the wrong player in the markets is a short seller. This is typically a trader, not an investor, who is betting a stock is overvalued and is going to drop. When you short sell a stock, its the opposite of going long (buy low, sell high). Here, you borrow shares from your broker and sell them. Later, you have to buy to cover and give them back to the broker.
Shorting isnt a game for the faint-hearted and is best left to professionals because of the high degree of risk. For example, if you buy a stock for 100 shares of XYZ company at $30 a share, the most you can lose is the total of your investment--$3,000if the stock goes to zero. Conversely, if you short a stock and it goes up, your potential loss is unlimited.
Some people have made money shorting stocks, lots of it. One is Fahmi Quadir, the founder and owner of Safkhet Capital, a five-year-old New York City-based short-only fund that says it concentrates on delivering superior returns through fraud identification and deep forensic research.
Quadir was cast into the limelight when, while working for another firm, she executed a short on high-flying Valeant Pharmaceuticals in June 2015, just as the stock was nearing its top. By mid-year, the organization she represented had a $30 million short bet on the company, 10% of the funds positions.
In an article published in the London-based magazine Square Mile, Quadir said she realized that Valeants practice of buying companies and raising the prices to stratospheric levels was questionable, to say the least.
Valeant had a certain reputation within the industry, she says. I knew it was already engaged in unethical, potentially fraudulent practice. Pharmaceuticals are a very established industry, when someone tries to disrupt it and post unusual numbers, theres probably something wrong.
Much of Valeant's business rise was predicated on serial dealmaking, rather than research and development, and extreme price hikes. A buyout of Marathon Pharmaceuticals, for instance, was followed by price hikes of over 500% and 200% on the heart drugs Isuprel and Nitropress, reported BioPharma Dive.
The Valeant short was a bonanza for Quadirs firm. Between July 2015 and March 2016, the companys stock cratered, going from $257 to $28 losing 90% of its value making it the biggest profit maker for the fund in 2016. The full story behind Quadirs role in bringing Valeants shabby business practices in focus is described in the episode entitled "Drug Short" in the excellent Netflix Inc. (NASDAQ:NFLX) documentary series "Dirty Money."
Under current CEO Joseph Papa, Valeant changed its name to Bausch Health Companies Inc. (NYSE:BHC) in May 2018. In 2020, the Canadian drugmaker agreed to pay $45 million to settle U.S. charges that it misled investors by improperly accounting for revenue channeled through a mail-order pharmacy it helped to set up.
In the must-see episode, Quadir offers sage advice to investors and potential short sellers.
No company is out there telling you why you should short their stock," she said. "Every source of information, everything the company tells you, everything you hear on CNBC is largely people telling you to buy a stock. So to go short you need to find the information on your own.
This article first appeared on GuruFocus.
