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Activist short-seller Ben Axler, the CIO and founder of Spruce Point Capital, argues that there are still plenty of opportunities to bet against certain stocks in this bull market.
“You really can’t short a stock because it’s overvalued — that just doesn’t work,” Axler said in an interview with Yahoo Finance’s Myles Udland. “We really have to find problematic companies that are declining organically, ideally layered with a lot of debt, poor management, and most likely to miss aggressive estimates.”
A forensic financial researcher, Axler takes an investigative investment style that includes looking for companies that might be hiding financial strain through aggressive accounting or using M&A to paper over problems. He then publishes his findings publicly on his website. To date, he’s exposed more than $1 billion in alleged frauds.
One of his recent targets is Maxar Technologies (MAXR), which he alleges has “pulled one of the most aggressive accounting schemes” he’s ever seen. He notes that the company is burdened by debt with almost no cash and free cash flow.
“We think the earnings are almost meaningless,” Axler said. “If you were to value it on cash flow, they have $3.7 billion of adjusted debt. We think the stock could be worthless. This non-GAAP/GAAP issue is continuing to be pervasive.”
GAAP is short for generally accepted accounting principles, which is aimed at standardizing financial reporting. Companies are required to report their results according to GAAP, but managers often also provide non-GAAP numbers, which include various adjustments that managers argue account for non-recurring items. Non-GAAP numbers often come with controversy since they are largely determined by the subjective judgements of management.
“Bad Management” + “Bad Company” + “Bad Balance Sheet”
Regarding Maxar, the company’s CEO was part of the management of a previous company that had been a short target of Axler.
“For every company we review, I first look at the management, I look at the board of directors,” Axler said. “We do background checks [to] try to make sure the bios are being accurately presented. In the case of Maxar, we found the CEO had claimed to be the COO of NCR, but he was really only the group COO, so there was some form of embellishment going on there. But it’s really the people that behind the numbers driving the financials that are making the assumptions that go behind the earnings. That’s what really gets us excited.
“When you pair a bad management team with a bad company and a bad balance sheet then you have the perfect short.”
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.