Porter Stansberry loves to take strong, vocal positions on controversial stocks, and some of those have worked out well. He also rubs a lot of people the wrong way, partly because of his abrasive libertarian screeds and his aggressive marketing campaigns and partly just because he comes across as brash and wealthy. I’ve met with Porter and he seems like a perfectly reasonable guy in person, but I’m sure he also knows that bold statements and certainty sell newsletters — waffling and quibbling and “on the other hands” don’t catch readers’ attention in our information-saturated age (unfortunately, waffling and worrying about both sides of an argument are your friendly neighborhood Stock Gumshoe’s cross to bear … I’ll happily take your subscription dollars anyway, but I can’t promise much in the way of clear and bold certainty).
And Porter is a vocal proponent of some things that many investors don’t particularly like doing or feel comfortable doing, like income-generating options trades, corporate bonds, and shorting stocks. So when several readers sent me copies of his latest letter over the weekend, I thought I’d take a look.
This particular letter Porter wrote, which was published on his Daily Crux site, is not an investment recommendation, it’s a story about leadership risk, for lack of a better term. The example he focuses on is “Chainsaw” Al Dunlap, who was, so Porter says, a psychopath who used suspect accounting, acquisitions, and mass layoffs to build a reputation as a turnaround artist of a CEO, with stints at Scott Paper and Sunbeam particularly leading to his celebrification as a corporate leader. You probably remember Dunlap, who was a media darling for a little while in the mid-1990s, and I won’t run through the whole story, but Porter focuses not just on the accounting misdeeds that later came to light, but particularly on the destructive power of employee stock options, which he says were used by Dunlap (and, as you’re probably more aware, by lots of tech boom companies in the 1990s) to essentially take employee compensation off the books as an expense.
And then he starts hinting around about someone who might be the next disaster in waiting …
“I’ve been pondering the question of whether a certain major software executive, someone who is today lauded by all of Wall Street as a ‘genius,’ might in fact be – like Al Dunlap and Henry Nicholas – a genuine psychopath who’s going to destroy his company and wipe out millions of investors….
“For me, the telltale sign of a psychopath is someone who knows… or has reason to know… that the policies and procedures he’s using aren’t going to work. Consider Al Dunlap. From the very beginnings of his career, he was getting fired for horrendous personal behavior and accounting shenanigans. It seems clear that he couldn’t control his urges to abuse people and lie.
“I’ve spent the last few days researching one company whose CEO is brilliant. He’s far too smart not to recognize that his abuse of employee stock options grants is completely unsustainable. But still… stock-option expenses are now growing faster, year over year, than revenues. Over the last three years, the results of these policies have been massive losses – which are growing larger, year after year.
“So far, this CEO has succeeded in distracting Wall Street from these facts with several acquisitions. He’s paid the investment banks a lot of money to do bond issuance for him, which has kept the analysts from downgrading his stock.
“But… the most recent deal will prove to be his undoing. It was a $2.5 billion deal. And he was forced to pay in cash. Suddenly, the companies he’s buying won’t accept his stock as compensation. That’s a sure sign in Silicon Valley that something is about to go terribly, terribly wrong….
“Here’s a prediction: Sooner or later, we’ll find out that this guy wasn’t merely a bad businessman. He was a genuine psychopath.”
So as I said, it’s not really a stock tease — but it implies to me, given the fact that I know Porter has recommended short selling several times in the past for subscribers of his Stansberry’s Investment Advisory, that he’s probably recommending a short sale of this stock. Probably.
What, then, is the company?
This is, sez the Thinkolator, Salesforce.com (CRM). And the potential psychopath must be CEO Marc Benioff.
But if you want to go out and short Salesforce.com, do keep in mind that you will be in a crowd — it may be that most people probably wouldn’t call Benioff a psychopath, and I doubt that all the short sellers are expecting accounting scandals or a disaster that sends the company under, but CRM is probably among the most-shorted stocks in America. Close to 10% of the shares are sold short, and since there is high insider ownership and huge institutional ownership that causes somes sites (like Yahoo Finance) to classify CRM as having 75% of its float sold short. “Float” is a tough concept to use in this case, since it cuts out a lot of the institutional ownership and Salesforce.com shares are very, very actively traded, but the “days to cover” is pretty big too — at their average trading volume it would take seven or eight days to clear the short positions by buying back shares, which means CRM is one of those stocks that’s both often touted as a short and frequently talked about as a “short squeeze” candidate.
Selling a stock short is fairly simple in practice — you do a “sell to open” transaction instead of a “buy to open” transaction, but behind the screen of your brokerage trading window what’s happening is that you’re borrowing the stock from another investor and selling it at the current price. That means you owe that investor not a specific amount of money but the return of their shares — so if you sell short 100 shares at $36, you have to return those hundred shares to the investor who lent them to you (you’ll also have a cost to borrow, determined by your broker — a percentage that you’ll pay effectively as interest on the value of the shares you sold). In order to return them, you’ll have to buy them back to close the trade — so the hope is that you can buy them back at a lower price and book the difference as your profit. You don’t really “buy” anything to start this transaction, but you do commit your fundsd and your broker will hold some of your cash and/or your margin account as collateral to make sure you can close the trade.
A short squeeze is when those who have sold the stock short are forced to buy it