Steven Romick (Trades, Portfolio) is the portfolio manager of the long-short FPA Crescent Fund. During the fourth quarter, Romick shorted four additional positions, bringing the fund’s total number of short positions to 29.
In a 2009 interview with Forbes, Romick said he views shorts as absolute opportunities.
“We try and short stocks where there will be profits in it for us, but it also helps dampen the volatility of the portfolio,” he said.
While Romick said short sellers who talk down stocks and spread rumors should not be involved in the markets, short sellers in general do not deserve the criticism they often receive. He argues short selling keeps investors honest, because those who short good companies will lose a lot of money.
The chart below shows the Crescent Fund’s annual returns compared to the S&P 500.
In 2012, Romick sat down with GuruFocus to answer questions from readers. That interview can be found here.
The shorts recorded in the fourth quarter in order of portfolio impact are:
- Medtronic (MDT, Financial)
- Alibaba (BABA, Financial)
- Yahoo Japan Corp (TSE:4689, Financial)
- WW Grainger (GWW, Financial)
Romick is shorting 2,425,900 shares of Medtronic at an estimated trade price of $72.20 per share. The stock currently trades at $72.76.
Medtronic is a medical technology company that develops and manufactures medical devices primarily for cardiac rhythm disorders, cardiovascular disease, neurological disorders, spinal conditions, and others.
The company’s stock has been up 21% over the past year. The DCF model projects a fair value of $37.46, giving a margin of safety of -94%.
A few of Medtronic’s numbers have been worsening over time, including its cash-to-debt ratio which is currently 1.06, and lower than the industry median of 2.09. Its dividend yield is currently 1.64%, which is near the five-year low.
Romick is also shorting 1,346,300 shares of Alibaba, the Chinese ecommerce company that is often compared to Amazon (AMZN).
As of the third quarter, 25 gurus hold long positions in Alibaba. Romick may be betting that the hype over the company’s historic IPO will be its downfall.
One of Romick’s largest shorts is 7,114,000 shares of Yahoo Japan Corp, which he sold at an average price of ¥419.40 per share. The stock currently trades at ¥405. When comparing the stock price to the Peter Lynch earnings line, the resulting graph suggests Yahoo Japan is overvalued.
The stock is also overvalued according to the DCF model, which estimates the company’s fair value as ¥342.76, giving a margin of safety of -16%.
Yahoo Japan’s free cash flow growth rate has been -15.3% over the past year.
Romick is also shorting 96,000 shares of WW Grainger at an average price of $254.90 per share. The stock currently trades at $237.92.
WW Grainger distributes maintenance, repair and operating supplies to businesses and institutions. The company serves about 2 million customers worldwide through its branches, distribution centers, and website.
The stock has been down 9% over the past year. When comparing the price to the Peter Lynch earnings line, the graph suggests the stock may be overvalued.
One warning sign for the stock is WW Grainger’s cash-to-debt ratio of 0.7. A ratio of less than 1 indicates the company is not able to cover its short-term liabilities with cash on hand.
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