Biz caught short
Bearish hedge traders target media stox
Short sellers -- stock and options traders who wager that a share price will fall rather than rise -- are making hay while the rain falls, and they may be starting to smell blood in more media industry stocks.
"There's a lot of market volatility, and a lot of investors playing off that volatility are making huge inter-day gains," one investment analyst said, noting the recent ups and downs of companies like AOL Time Warner.
(An investor selling a security short effectively borrows shares of a security then sells them, in the expectation that those shares will fall in value, allowing the investor to later buy the shares at a lower price and return them.)
Cable shares have already been hammered by short sellers, due to a pervasive feeling that the overleveraged sector is overvalued, given the seemingly muted demand for digital services. Led by big-spending, poor-earning companies like Cablevision, Adelphia and Charter, cable stocks have fallen nearly 70% over the last year. Charter has been among the worst hit, with 26.8% of its floated shares -- shares available to the public -- shorted.
Leading hedge fund manager James Chanos, for one, thinks the worst may be yet to come. Chanos, president of New York-based Kynikos Associates and famous for being one the first to call attention to (and profit from) Enron's accounting woes, believes cable is right behind the telecom companies as the next financial catastrophe. He notes that the sector has generated a highly unremarkable 5% return on capital over the last 18 years of cable build-out and development.
But sources say the larger media congloms -- despite sharp share price drops over the past year -- may still be trading at multiples that exceed their short-term growth capacity, and are therefore vulnerable to the short-selling phenomenon.
Most of the traded broadcasting stocks have a higher percentage of shorts than they did a year ago, as do the cable operators. Among the media companies, Pixar and Vivendi Universal have attracted more short selling over the last few months, while the shorts have already feasted on AOL Time Warner and Disney over the course of the year.
Short sellers can make their money by spotting incongruities in a firm's financial statements before the general public (or even many analysts), then exploiting them. For instance, one source hinted there are still many entertainment companies that are not appropriately expensing film costs; capitalizing rather than expensing these costs artificially raises earnings and hence inflates trading multiples.
Shorting stock is usually less an investment technique than it is a method of minimizing risk, but for some hedge funds, gambling against the market has been highly profitable.
Since by its nature, shorting a stock involves selling it, thus putting downward pressure on the price, the day-to-day trading manipulations of the shorts can turn a company's stock price into a yo-yo, creating other money-making opportunities for short-term traders.
Meanwhile, shrewd investors like John Malone use hedges to protect their portfolios. Malone's Liberty Media, for instance, reportedly has a "put" (right to sell) on his 58 million AOL shares at the princely price of $48.
