Short Sellers Bet On Homes, Health Turn, Comeback for Techs
By RAJIV VYAS
Orange County stocks could be in for a reversal of fortune, at least if short sellers have anything to say about it.
After a strong 2002, housing and healthcare stocks could lag in the coming months, while some beaten-down technology companies may end up besting the broader market, according to data on short selling compiled by Los Angeles-based The Seidler Cos.
The short selling in housing-related stocks,OC’s strongest sector this year,is most dramatic.
Take Newport Beach-based Impac Mortgage Holding Inc. The number of shares sold short in the mortgage real estate investment trust rose from 6,500 shares in January to 1 million shares in October. Impac had the biggest percentage increase in shorting activity during the period.
Short sellers sell borrowed shares with the hopes of buying them back at lower prices and returning the stock to the lender.
The tactic is risky. But, in some cases, short sellers can offer insights into which stocks may fall in and out of favor on Wall Street.
Short sellers “made money by shorting the tech sector and now they are hitting the biotech (and housing) sectors,” said Rick Sample, managing director of corporate services at the Irvine office of Seidler.
OC housing-related stocks already are off their highs after big gains earlier in the year. Many investors think the housing market can’t keep up its torrid pace, making a bigger correction possible for lenders, builders and other real estate players.
Orange-based title insurer American National Financial Inc. posted the second biggest percentage increase in short selling activity through October. The number of shares sold short in the company rose from 1,162 in January to almost 94,000 two months ago.
Newport Beach-based homebuilder William Lyon Homes Inc. saw a similar rise in short selling activity.
But the skepticism isn’t across the board. Irvine-based homebuilder Standard Pacific Corp. saw a small decline in short selling.
Short sellers are betting that “price levels and underlying fundamentals are not sustainable,” said Alan Beimfohr, president and founding partner of Knightsbridge Asset Management LLC, a Newport Beach-based money manager.
Short selling in 63 OC stocks grew to 155 million shares in October from 123 million shares in January, according to Seidler. In all, 4.3% of shares outstanding were sold short in October vs. 3.4% nine months ago.
“After several years of a down market, people have become comfortable being short,” said Gene Phillips, head of the trading desk at Knightsbridge. “Every time the market has rallied, those who had short sold have made money.”
Twenty-three of the 63 companies looked at saw decreases in short selling activity through October, while 43 had an increase.
Besides housing-related stocks, some healthcare companies saw more short selling.
Fullerton medical diagnostics gear maker Beckman Coulter Inc. saw a 349% rise in its shares sold short. Nearly 6% of Beckman’s shares outstanding were sold short.
The company, which recently reported lower-than-expected sales growth for the third quarter, had the biggest increase in short selling volume among healthcare companies.
Irvine-based heart-valve maker Edwards Lifesciences Corp. also had a big percentage rise in short selling. The company saw short sales rise by 180%, representing 1.85% of its shares outstanding.
Another possible reason for the rise in short selling: hedge funds.
Hedge funds manage close to $700 billion in assets, according to Beimfohr. Many hedge fund managers have mandates to be market neutral,meaning they might buy stocks of an undervalued company in a sector and offset that by short selling stock of an overvalued company in that sector.
The rise could be “hedge funds deciding that these companies are not going to fare well,” Beimfohr said. “They are a different category of investors.”
Three OC companies had more than 20% of their shares outstanding sold short.
Irvine-based medical device maker Endocare Inc. was a short sellers’ favorite. Almost 38% of its outstanding shares were sold short in October, up from 19% in January.
New Century Financial Corp., an Irvine subprime housing lender, was next on the short sellers’ list with 23.5% of its outstanding shares sold by investors that did not own it. In January, only 9.6% of the financier’s share was sold short. About 90% of New Century’s business is refinancing mortgages at lower interest rates,which could rise next year.
Aliso Viejo-based QLogic Corp., which has held up relatively well in the tech downturn, was the third favorite with 22% of its shares sold short, up from around 10% in January.
While healthcare and housing related stocks saw more short selling, some tech companies saw the opposite.
Thirteen tech companies saw a decline in short selling since January or saw short sellers cover their positions in expectation of rising stock prices.
Tustin-based Quality Systems Inc., a maker of software for the medical industry, had an 86% decline in the number of shares sold sort. Only 0.02% of the company’s shares outstanding were sold short.
For Irvine-based Rainbow Technologies Inc., a maker of security software and devices, the drop was 85%, with 0.27% of its shares out sold short.
Big tech names such as Irvine-based Broadcom Corp. and Costa Mesa’s Emulex Corp saw small declines in short selling activity.
