If you have internet access, then you probably know about Grumpy Cat. The popular online meme has more than a million Facebook likes and over 100,000 Twitter followers, thanks to her uniquely dry brand of put-down. Here’s my personal favorite:
Don’t you think that Grumpy Cat would make a great hedge fund manager? Brutal, remorseless and playing no favorites, GC would thrive in the land of absolute returns. Plus she’d have the advantage of being a cat, and therefore unlikely to care at all about other people’s opinions – especially those of Wall Street analysts.
At the Grumpy Cat Hedge Fund, GC could delegate the longs to the natural optimists (dogs!) and focus on the painful side of the ledger. Where to start?
Well, as part of our discipline at Crabtree Asset Management, we run a quarterly screen looking for long candidates, ranking them by quality and choosing among the high-scoring ones when we rebalance the Crabtree Technology portfolio. Just for fun though, we occasionally check the bottom of the rankings, looking for the dregs of the dregs, including formerly high-fliers as well as chronic under-achievers.
How about Geospace Technologies Corp. (GEOS)? This Houston-based company sells a variety of technology solutions to the oil-and-gas exploration industry. For example, GEOS specializes in the acquisition and processing of seismic data as well as the characterization and monitoring of producing oil and gas reservoirs.
Geospace is also a reservoir of pain, burning through more than $42 million in negative operating cash flow in its last two reported quarters on $154 million in revenue. This kind of hairball performance has already caught short sellers’ attention, with over 16% of Geospace’s float already sold short. But the way GEOS stock rose 13% on May 3rd when it reported its horrible March quarter suggests the negativity may be baked in.
So we need to look elsewhere on our List of the Damned. It’s worth noting that our view of “technology” includes several sectors that aren’t officially categorized as tech, but which have a number of characteristics that are similar to many traditional technology companies – e.g. high R&D spending, potentially high gross margins.
Interestingly, biotechnology companies in general score pretty poorly in our quant screen. They tend to have stratospheric valuations, prodigious cash burn rates, and generally need to raise round-after-round of financing, all in a (usually) vain attempt to make it to the promised land of Phase 3 trial success, FDA approval and an “Amgen-is-holding-for-you-on-line-two-Mr.-President” phone call .
But research shows shorting Biotech categorically is a sucker’s bet. Why? Just take a look at long-term Biotech performance. Specifically, check out the iShares Nasdaq Biotechnology ETF (IBB), one of the oldest around. Over the past ten years IBB is up 172%. The S&P 500 is up only 69% over that same time frame. Even the more adventurous Nasdaq Composite is up only 108%. (Source)
Wow! Or as Grumpy Cat might put it, “Ackk!”
But wait: just because Biotech as a group has done well over time doesn’t mean there aren’t some real hairballs among the crowd. Take, for example, Vivus (VVUS). This Silicon Valley based biotech firm is perpetually raising money to work on remedies for obesity, sleep apnea, diabetes and various sexual dysfunctions. But it’s also a picture-perfect short candidate.
In its most recent reported 12 months of business, it had $181 million in negative cash flow on…wait for it…just $6.1 million in revenue. It has missed Wall Street’s expectations in each of the last four quarters and its trailing price:sales ratio is 225. I think we have a winner! Er, I mean, loser.
And Grumpy Cat would definitely approve. She knows that while it’s generally good to think outside the box, the really bad stuff is still in the box.
The investments discussed are held in client accounts as of June 30, 2013. These investments may or may not be currently held in client accounts. All investments involve risk (the amount of which may vary significantly) and investment recommendations will not always be profitable. The opinions and views expressed herein are of the portfolio manager and may differ from other managers, or the firm as a whole. Past performance does not guarantee future results.
