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Whitebox Shorting ‘Never Never’ Stocks in Graham Reversal

Whitebox Advisors Founder Andy Redleaf
Andy Redleaf opened Whitebox Advisors LLC to investors in 2000 after leaving Deephaven Capital Management LLC, which he co-founded in 1994. Photographer: Daniel Acker/Bloomberg

Whitebox Advisors LLC is looking for the “Never, Nevers” to bet against in the stock market.

The $3.8 billion investment firm founded by Andy Redleaf said in a May letter to investors that it’s shorting 18 stocks, including Facebook Inc., LinkedIn Corp., Athenahealth Inc. and Under Armour Inc., that it believes will never make profitability their top priority or return cash to shareholders.

The firm, based in Minneapolis, christened “Never, Never” as an homage to legendary value investor Benjamin Graham that reverses his concept of “Net, Nets.” Graham’s nickname referred to companies that are good buys because their assets minus liabilities and accounts such as overvalued inventory are valued higher than their stocks’ market capitalizations.

“A Never, Never is a public firm that will never, ever make profitability its first priority and will never, ever willingly deliver a penny of cash back to shareholders,” Whitebox wrote in the letter. “If the value of a stock is the appropriately discounted value of all future dividends, we believe the correct valuation of a Never, Never approaches zero.”

Whitebox is betting against technology, health-care and retail companies. The index of Never, Never candidates was created by considering firms with more than $1 billion in market capitalization, annual revenue growth of at least 10 percent, operating expenses that grow faster than revenues and companies that show an absorption of capital, those that, for instance, don’t buy back stock or pay off debt. Whitebox then used fundamental analysis to whittle its list of more than 100 names.

Index Construction

The investment firm had already shorted some of the stocks prior to constructing the group, it said in the letter. In a short sale, an investor sells borrowed shares to bet on a decline, hoping to buy them back cheaper and pocket the difference.

Redleaf opened Whitebox to investors in 2000 after leaving Deephaven Capital Management LLC, which he co-founded in 1994. Initially a hedge-fund firm, it now offers mutual funds, including the Whitebox Tactical Opportunities Fund.

The index is for “illustrative and educational purposes,” the company said in an e-mailed response to questions. Even as Whitebox has bet against the shares of all the companies, it may at any point “be short, long or have no position.”

Aristocrats Index

Shares of companies that return cash to shareholders tend to perform better than the broader market. The S&P 500 Dividends Aristocrats Index, which measures the performance of companies that have consistently increased payouts, has beaten the Standard & Poor’s 500 Index in four of the last five years. A Bloomberg index of the companies with the biggest buybacks over the previous 18 months rose 57 percent from its October 2007 inception to May 27, more than double the S&P 500’s return.

Other companies Whitebox was shorting include Inc., OpenTable Inc. and Kate Spade & Co. Hedge-fund manager David Einhorn said last month that his Greenlight Capital Inc. shorted a basket of technology stocks “that have reached prices beyond any normal sense of valuation,” including Athenahealth, which provides Internet-based business services for physician practices.

Athenahealth declined 2.7 percent to $124.71 in New York, extending losses this year to 7.3 percent. Facebook rose 4.6 percent to $65.77 and has climbed 20 percent this year.

Irrational Nature

“If they are right they will have a big year but the cost of carrying the shorts and the irrational nature of the markets make it a risky bet,” said Jay Rogers, president of Irvine, California-based Alpha Strategies Investment Consulting Inc., which advises hedge-fund clients and managers.

Spokesmen for Facebook, LinkedIn and Whitebox list members Advisory Board Co., Marketo Inc., NetSuite Inc. and Workday Inc. declined to comment on the letter. Spokesmen for Athenahealth, Cepheid Inc., Concur Technologies Inc., Equinix Inc., Infoblox Inc., Kate Spade, OpenTable, OPKO Health Inc., Palo Alto Networks Inc.,, Shutterfly Inc. and Under Armour didn’t immediately respond to requests for comment.

The Whitebox Never Never Index:

Advisory Board Co.
Athenahealth Inc.
Infoblox Inc.
Concur Technologies Inc.
Cepheid Inc. Inc.
Equinix Inc.
Facebook Inc.
Kate Spade & Co.
LinkedIn Corp.
Marketo Inc.
NetSuite Inc.
OpenTable Inc.
OPKO Health Inc.
Palo Alto Networks Inc.
Shutterfly Inc.
Under Armour Inc.
Workday Inc.

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