I barely ever sell short as an independent strategy. I often execute short sales as part of a hedged merger arbitrage strategy, where I buy the target of a share merger and short sell the buyer to hedge away the risk that it's shares decline. I've written about probably a hundred of those deals for Microcap Review subscribers, where special situations are a big part of my subscription service.
But shorting by itself is a different kettle of fish altogether. The market has a natural upward movement, because on aggregate corporations earn money, and that money belongs to the shareholders. Shorting stocks also has a negative asymmetry to it, since the downside is theoretically unlimited, while the upside is capped. After all, there is no limit to how high something can go, but a stock can't go lower than zero (as long as the limited liability doctrine holds).
Because of these negatives, I very rarely short sell anything. I only do so when I'm confident I have identified a great risk-reward opportunity. In fact, of my more than 200 articles on Seeking Alpha, so far I've only written 3 pure short thesis articles (once again excluding merger arbitrage/pair trade type ideas).
A subscriber recently asked me for a breakdown of my history as a short seller, and I provided the following. I thought it might be interesting to others so I'm publishing it as a blog post.
Dundee Corp
I published this short piece on May 6, 2019 about Dundee Corp (OTCPK:DDEJF). They are a bit of a conglomerate with a focus on real assets and commodities. They have a poor track record over the last many years, but what pushed this to a pure short was the catalyst of them converting a preferred issue to common shares. That put a huge number of common shares into the hands of income investors who wouldn't want them. I closed the short on June 14th, 2019 (in the comments section of the linked article). Shares were at $1.14 when I wrote this up, and $0.94 when I closed the position, for an 18% gain in ~6 weeks.
Alaska Air
On April 11, 2017 I published this piece arguing for a short sale of Alaska Air (ALK). I suggested the company would have significant extra expenses (especially labor) as a result of their purchase of Virgin America, and that synergies would be harder than they expected to extract. Plus, the merger ended their Delta partnership, and Delta opened up a hub in Seattle in response. I looked at pricing on the routes Delta was adding and observed it dropped an average of over 30% after the Delta start-up. The market seemed to think the merger was a panacea, but I did a great deal of research and disagreed. I closed the trade in the comments section on Oct 28, 2017 at $66.58, down 25% from $89.04 when I wrote it up against a rising general market at the time.
Ivanhoe Energy
This piece was about a Canadian oil sands development stage company. I wrote it up as a short on Oct 28, 2014 when shares were at $1.59. I covered (and wrote a comment on the article saying so) on March 2, 2015 at $0.22. Their assets were obviously terrible. Their Ecuador asset was in the process of getting nationalized, and the regulator in Alberta sent them a letter (which I found in the public record) that basically said they wouldn't approve the project. But the Robert Friedland cult of personality surrounded the stock and buyers held on. They filed for bankruptcy in June, so calling them a terminal short in the title of my piece (which I took tons of virulent criticism for at the time) was justified.
Conclusion
So far my hit rate on the short side is 100%. I believe I predicted both the decline and the reason for the decline in all three cases. That said, I don't think shorting is easy, and I doubt I'll ever come up with more than one short idea per year. I also doubt I'll be able to keep that 100% hit rate forever, so I will continue to keep my short sales on the smaller side. If you're not already a follower and want to be notified of my future pieces, hit the big orange "Follow" button at the top of the page.
While my subscription service (the Microcap Review) is primarily focused on long ideas about small companies with good businesses and special situations (merger arbitrage, tenders, etc) subscribers will also get a first look at all future ideas on the short side. If you'd like to try it risk-free, learn more about the two-week free trial here.