John Durie
Short selling a ‘valuable tool’, as contrary views bring balance
Short selling is a valuable tool for the Australian equities market and the emergence of offshore hedge funds “raiding” Australian companies should be welcomed by Australian investors.
Without the balance provided by contrary views the market would, by definition, suffer.
Richard White and his team at WiseTech would beg to differ having spent all last night working on his defence to a report from J Capital which threatened to send his stock into freefall.
There is something not quite right with the concept of an investor getting set in a stock either short or long, spruiking the position and benefiting as it either falls or rises.
The point is both sides are as guilty as each other in this attempted manipulation and in fact, they are just contributing to a debate on value which is in everyone’s interests.
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Sell-side research in this market is dominated by investment banks who make most of their money either raising funds for listed companies or helping them with acquisitions or divestments.
The last thing these people want is for the truth to be told if it conflicts with their deal.
This results in a fundamental bias to the buy side and an institutional distaste for negative views being published about a stock.
If it wasn’t for some canny active fund managers who said no when KKR et al went around trying to offload Latitude, the market would be stuck with an over priced old school finance company.
WiseTech is selling on a price earnings multiple of 104 times forecast earnings, or 6.5 times the market average.
Some may say that indicates it is overpriced and the fact it has made 33 acquisitions in five years worth over $400m also invites suspicion.
Timing in question
White also makes a legitimate complaint about the fact the report is released in the middle of the trading day which can impact price before the market is fully informed.
White affirmed guidance and issued a strong defence on Wednesday.
He wouldn’t agree quite yet, but the debate is the best thing for the company going forward.
If, as he claims, the J Capital report is nonsense then next time it releases a report on a stock it will be ignored.
Some argue hedge funds should bounce their ideas off the company before disclosing, which is total nonsense.
It is good journalism to check both sides of a story before publishing, but that creates credibility. If J Capital is proved to be wrong, then its credibility and that of other short sellers takes a dive and it won’t be such a lucrative model going forward.
The news media, which happily talks up short sellers reports without considering the motive of the short sellers to balance their articles, equally suffer credibility gaps.
Not every short seller will play by the rules, but provided no laws are being broken then the market is a net beneficiary of short selling to provide some balance and help in accurate price discovery.