Stop losses and shorting – Techinvest caught out with Blinkx

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Stop losses are a way that many investors use to limit the downside risk on stock market investments. They help to counter the “loss aversion” psychological trait that encourages you to continue holding a stock because you have fallen in love with it whereas everyone else is seeing it differently, or may have some information that you do not.

But as that well respected publication Techinvest has just found out, there is a significant problem when there is an active shorting campaign on a stock. Techinvest is a newsletter edited by well respected commentator on technology stocks, Conor McCarthy. His model portfolios in the newsletter, and the fund his company manages (the MFM Techinvest Technology Fund), have a great track record. Mr McCarthy’s style is to hold stocks for a long time rather than bounce in and out which is probably a wise strategy on small technology stocks, and he only tends to sell when news flow tells him the investment case has changed. But he does publish recommended stop losses.

At the start of 2014 Blinkx was one of the editor’s New Year Tips (it had been in the model portfolio since 2010 and had become a significant part of the model portfolio at over 8% (it’s also held in the Fund). The share price was about 65p at the time, and no doubt helped by the recommendation (Techinvest is quite influential), the share price powered ahead. But as any Blinkx holders will be aware, the company came under attack by shorters recently and a blog was published by an Associate Harvard Professor (who had been paid to write it, it subsequently transpired) which questioned the company’s business model and ethics.  An extensive report on this was in the last ShareSoc Informer Newsletter, and there is likely to be more in the next one. Allegations of market abuse have been made to the FCA.

Techinvest had set a stop loss of 158p on the stock which was triggered last month. But unfortunately the model portfolio manager was “a little slow to react” it is reported in the latest edition so only managed to sell about 25% of the holding at 139p.

There is lengthy analysis by the Techinvest editor of the claims and counterclaims on Blinkx in the latest edition and he looks also at another shorting attack by Carson Black of Muddy Waters on a US listed company, NQ Mobile. Mr Black is involved in shorting Blinkx. The editor has this to say: “The ferocity of the blitzkrieg-style assault launched by the coordinated shorters was a first-ever novelty shock for London market participants. Having tasted blood once, you can bet the attackers will be back, except this time it will be a different victim.”

With Blinkx now at about 100p (the share price is bouncing around of late), the Techinvest editor how rates the shares a “Speculative Buy”. He argues that the share price could rebound as it did with NQ – which plunged 54% on the day Black attacked it, but then rebounded subsequently by 161% and it almost back now to where it stood before.

Comments: there is certainly money to be made in some cases by acting contrary to the hype promoted by shorters. Take Weir for example, one of the most heavily shorted stocks in 2012 with dire prognostications about future revenues due to rumoured cut backs in drilling activities. The price fell to as low as 1400p. It’s since risen by 180% to 2560, helped by a positive results announcement last week. Yes dear reader, that was one of this writer’s more successful investments when I concluded the rumours were overdone and that analyst’s forecasts were more sensible.

Techinvest also reported stop losses being breached on Blur, Cyprotex and Globo during the month. The last stock was one of their model portofolio holdings but they did not exit because the manager also uses discretion on whether to follow stop-losses recommended to readers. This is surely a wise approach. It’s easy to get bounced out of volatile small technology stocks due to short term adverse news, rumours and speculators – even a small amount of trading can have a disproportionate effect on the share price. Globo was another UK stock that came under attack by shorters who vigorously promoted their views about the company.

Now shorters tend to attack stocks where they can put together a good story. Those that have raced somewhat ahead of fundamentals are always good targets. So the key is to decide whether you believe the shorters’ story or whether they are simply giving an unbalanced view.

We shall no doubt see in due course whether Blinkx is good value or not at this time. But the key point about stop-losses is surely not to follow them religiously, but use them to prompt you to reappraise the stock concerned. Do you believe the rumours, innuendo and negative comments posted on blogs and bulletin boards in such circumstances, and are they supported by verifiable facts? Is the share price really in outrageous territory on fundamentals? Those are the key questions.  Relying on the share price direction alone to tell you whether the company is a good investment, or whether it should be sold, is not a sound investment strategy.

Roger Lawson

Post Date: March 2, 2014

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