No Joy in Shortville

 | Jun 06, 2014 | 7:30 AM EDT
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Hey, short sellers, how about some originality?

How could more than 20% of Joy Global (JOY) be sold short? Do you think we haven't all read the coal articles? Do you think that, somehow, that would be a big secret, a huge surprise that would be overlooked by the longs? Do you think that, after natural gas goes almost to $5, there wouldn't be more coal used? Did you forget that you can use electric shovels for tar sands work and that Canada is abuzz with tar sands work? Did you not see that 16 out of 23 analysts have Holds or Sells on it for precisely the reasons that you are short, so they aren't going to downgrade on a bad number? Didn't you think that someone would break ranks, like Bank of America Merrill did, and go Hold to Buy? Could you really be that devoid of imagination?

I was astounded yesterday to see how short people were in this high-quality machinery company that has secular challenges, for sure, but is in a global industry where the rest of the world can't afford to be as anti-coal as we can. They don't have cheap natural gas. They are de-commissioning nuclear plants left and right because of Fukushima. And wind, as much as it is loved, is, even on its best days, not a factor almost anywhere in the world. Especially when it's cloudy or still out.

I point this mistaken short out because it is emblematic of so many shorts that I see. Thesis shorts, whether it be telco antenna stories that were all the rage not that long ago or housing-related businesses like Sherwin Williams (SHW) and Whirlpool (WHR) or the Clorox (CLX), Kimberly-Clark (KMB) and Brown-Forman (BF-B) shorts, a troika I always hear overvaluation calls on, are just plain too obvious. Sure, housing has its ups and downs. But the consolidation in the housing related plays is palpably positive. There simply aren't enough high-dividend plays to go around, so what's the point of betting against two of the best packaged goods stories around? Liquor plays are too few and far between. They just don't work, other than a few points.

Or how about the shorts in the disk drive companies or semiconductor companies -- think Micron (MU) -- when there's no new capacity on the books. Or the short of Caterpillar (CAT) based on China after United Rentals (URI) tells you the U.S. has returned to earth-moving growth. Just because the media calls you brilliant doesn't make you brilliant. Yet that's how I feel about those who have been blasting those stocks.

And now, shorts, you have to look out for the more established software-as-a-service plays and legitimate biotechs. They all got gang-tackled after they had broken and the head-and-shoulders patterns were everywhere. Now, though, the percentage of stock short, coupled with the end of massive insider selling --at least for the moment -- has made stocks like FireEye (FEYE) and Zillow (Z) and even Workday (WDAY) and Concur (CNQR) difficult, as well as Biogen (BIIB), Celgene (CELG) and Gilead (GILD). They had been terrific free-fire zones, but now they are just valuation shorts, which are shorts of the worst kind.

What should short sellers be looking for? Simple: secular decline shorts where there are accounting risks. Or competitive nightmare shorts where price-cutting is endemic, making the numbers too hard to make. Or stocks that are flying high, not low, even as the businesses aren't all that well rung, Think the bad retailers.

Shorting when people are negative, shorting where everyone else is shorting, can lead to remarkably bad results. Shorts take much more homework than longs. Shorts must be discovered early. Shorts require persistence.

But most importantly, shorts involve originality. Owing to the powerful logic of a bull market, they require ingenuity. Anything short of that and you might as well have a Joy on your hands.

And there will be no joy in shortville today. 

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