Carson Block and his firm, Muddy Waters, have become so respected as short-sellers that the mere mention that he's betting against a company can send its shares into a tailspin.
The most recent example was German advertising firm Stroeer, whose shares were pummeled late last month after Block announced his short against the company:
Then on Wednesday, he outlined his thesis for another short bet against Little Rock-based lender Bank of the Ozarks. And again, the stock turned south quickly. But it recovered just as fast and ended the day not much lower than it was when Block began his presentation at the Sohn Investment Conference , as shown in the V shape of its intraday chart below:
Why did this one fizzle when so many others -- not all, but many -- have achieved their objective of decimating a stock? It's hard to say exactly, but here are a few theories:
For one, Block built his reputation by uncovering outright fraud among Chinese companies like Sino Forest and NQ Mobile, eventually knocking the former out of business and sending the shares of the latter into a multiyear slide from which they still haven't recovered. The plunge in Stroeer also came after accusations from Block about nefarious-sounding practices, including overstating its cash flow by including acquisitions in growth calculations and buying companies with close ties to its executives. ("Far-fetched" is just one of the words used by Stroeer to respond to Block's thesis.)
The accusations against the Bank of the Ozarks were a bit tame by comparison, especially as they came at a conference that has become sort of a Super Bowl for shorts. It certainly sounds like the type of company that lurks in the "muddy waters" of financial markets where Block likes to fish: only seven analysts tracked by Bloomberg follow the stock.
The gist of the criticism was that the bank is a "roll-up" -- an aggressive acquirer of other companies that has become a nasty word in the post-Valeant world -- and that it's focused too much on risky construction loans. It's trading with a growth-stock valuation, but continued earnings growth is questionable. Bank of Ozarks sells for 2.5 times tangible book. By comparison, JPMorgan Chase's ratio is 1.3 and Citigroup is 0.7. In its latest quarter, Bank of the Ozarks' revenue and adjusted earnings-per-share growth were both more than 17 percent.
Some of the main points, according to a live blog by Bloomberg's Dani Burger:
- In general, construction loans are risky and OZRK is in mature markets like NYC, Miami, San Fran
- Not conservative in their loans, despite what management says
- funding costs have gone up and can only continue to go up
- CEO pay is pretty high
- They can't sustain earnings growth: at best they re-rate. At worst: they have a funding and obligation mismatch.
These may be true, but they sound a bit more like reasons not to buy a stock rather than a slam-dunk rationale for shorting it, especially compared with the high bar Block has set with many of the smoking-gun presentations he's made in the past.
It'll be interesting to see if and how Bank of the Ozarks responds (nothing yet), but CEO George Gleason discussed the risk of construction loans on a conference call last month, saying the bank's portfolio "has been built to withstand another Great Recession." In the main driver of its growth, the real estate specialties group, he said the leverage on loans was about 44 percent of appraised value, compared with percentages in the high 60s in the 2005-2007 period.
Also, the stock was already down 30 percent from its record high in December, and short interest has been elevated, so some bears may have used Wednesday's dip to cash in:
None of this is to make any judgment on Block's thesis but rather to offer some thoughts about why his presentation didn't send Bank of the Ozarks crashing harder. The shares did end the day down 4.4 percent, but that's not much lower than where they were before Block's remarks. It was a bad day for the market in general, and a particularly bad day for bank stocks in particular.
It could be the type of "short-and-hold" bet that would've worked after Block accused software company Proofpoint of fudging its growth in December. Those shares quickly plunged as much as 14 percent after his remarks, then recovered to end the day only 4.3 percent lower. But they then went on to lose almost half their value before they bottomed in February.
Still, a notable difference between the Bank of the Ozarks bet and most of Block's most-successful shorts is that he seems to be primarily making a call that's about a business model and the near-term outlook for the real estate market, rather than attempting to uncover some significant monkey business. As such, he risks fishing in waters that are muddier than usual.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Am I the only one who finds it sort of funny how this event raises money for a widely beloved cause of curing childhood cancer by bringing in widely despised short-sellers to announce their latest campaigns?
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