Shorting stocks based on a potential proprietary view that a company is fundamentally disadvantaged is a terrific tool for hedging a portfolio. Shorting stocks uses the same muscles that are used to select solid investments on the long side, with the exception of a couple of technical aspects.
Losing money on the long and the short side is every investors' right. It is the toll paid to invest and hedge. As much as it is painful at times, it is a necessary part of the game. I am mature about losing money most times, especially when it comes to the short side.
But what happens when something exogenous occurs to a company one is potentially short? The answer is pretty simple: You exit -- quickly. Revisit when the dust clears or just move on.
Today, an activist investor, Marcato Capital Management, founded by a protégé of Bill Ackman, announced a 5.1% stake in Buffalo Wild Wings (BWLD) . These activists, understanding the fundamental weaknesses that BWLD currently faces -- including pricing pressure in the core wing category, higher wage costs, excess capacity and margin differential between franchised and company-owned stores -- see an opportunity to improve the business and have held discussions with management.
I have been vocal about these weaknesses possibly continuing beyond a quarter or two and potentially causing meaningful downside to what I reckon are lofty earnings estimates this year and next.
Now with today's revelation, it is my opinion that there is at least a temporary floor on the shares here in the $140 range -- right about where I initiated the position. With shares currently up almost 5%, I'll just cover and move on.
Other restaurant stocks have gone through successful activist campaigns that have improved governance and profitability. BJ's Restaurants (BJRI) is one example that immediately comes to mind; there are others.
When this happens, the flesh wound simply has to be taken. The forces of activism and campaigns for corporate improvements are positive catalysts and make negative thesis almost impossible to navigate.
While I still believe BWLD shares will underperform based on the very real issues that have hamstrung sales comparisons and earnings growth lately, the arrival of Marcato confirms that there are real things to do. If management cooperates with certain improvement initiatives that may be put in place by a refreshed board of directors, some of the downside levers that I have identified in BWLD's business model could reverse.