Disclosure: The author has a short position in one or more of the shares mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
I took a lot of abuse on twitter recently. My crime, it appears, was forwarding a negative report on IQE plc (IQE) which seemed to me to raise some important questions about the company’s accounting treatment of two joint ventures it had established.
One tweet read: Looks like the shorting cabal have moved to target IQE….. basing a “short” case on “valuation” is one of the weakest basis for a short. Arrogant and hubristic to think you know better than the market.
This reflects a widely held view that short sellers operate like some sort of wolf pack, targeting innocent victims at random. Even the president of the New York Stock Exchange described the practise of selling before buying as “icky” and un-American. I listen to what many short sellers have to say but the “cabal” theory is wide of the mark.
As for “valuation” being a weak basis for a short: I do know a few bears who subscribe to this view but in my experience, valuation is a pretty good place to start when assessing a company’s suitability for a short (this is particularly true if, as in the case of IQE, the valuation hangs on what might be described as aggressive use of accounting). If you turn that on its head and suggest that basing a long case on valuation is a weak basis for buying a stock, then you would not be taken seriously by a lot of investors from Buffett downwards.
As an active investor, the act of either buying or selling a stock involves the assumption that the market has priced it wrong. Otherwise you would never beat the market. Thinking you know better than the market on a stock is not arrogant and hubristic, it is a necessary part of the job. For bears it is important to be right more often than not or they will not last very long.
That IQE should have Matthew Earl and now Carson Block (Muddy Waters) on its case is not a good sign for shareholders. The fact that being short IQE may be a crowded trade does not make it a bad trade.
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