Perfect Shorts produces and publishes alerts on the shares of companies that are identified that have a high probability of going to zero. The alerts are utilized to trade put options on the underlying shares of a perfect short candidate. The alerts are sent directly to an online broker who executes the orders for the purchase of put options for the behalf of the subscriber.
A key characteristic of a perfect short is that its shares have buy recommendations by one or more Wall Street analysts. Another characteristic for a perfect short is its being diagnosed with one or more of the following:
- The EPS Syndrome
- Cashless earnings
- Severe negative cash flow
The “perfect short” designation began to evolve in December 2001, after Enron filed for bankruptcy. The sudden collapse of Enron in 2001, compelled Michael Markowski, the founder of BullsNBears.com to perform an autopsy on the company and its financials. It’s especially since:
- At 10/18/01, all 15 of Wall Street’s analysts rated Enron a “buy” and when it filed for bankruptcy in December 2001, there was only one sell rating.
- Fortune Magazine had named as “America’s Most Innovative Company” for six consecutive (1996-2001) years.
- Most importantly as depicted in the chart below, Enron’s EPS was at an all-time high when it filed for bankruptcy.
Mr. Markowski utilized StockDiagnostics.com, a startup which he had founded to develop software to identify anomalies in the trading patterns and financial statement of publicly traded companies to conduct extensive research on Enron’s financial statements. His hope was to discover what could have predicted and prevented Enron’s demise. After discovering the key trait, it was back tested against the financials of more than 100 US companies which had gone bankrupt over the previous five years. They included Sunbeam which had also declared bankruptcy under circumstances which were eerily similar to Enron’s. The trait was then programed into a predictive algorithm which was named “The EPS Syndrome”.
The chart below depicts the EPS and the operational-cash flow per share (OPS) of Suprema Specialties which became the poster child for the EPS Syndrome. Within weeks after Suprema had completed a $50 million secondary financing and had reported record EPS for its 15th consecutive quarter the company filed for bankruptcy. At the time of its bankruptcy filings two brokers had buy ratings for its shares and numerous mutual funds had positions of at least 5%.
Beginning 2002, the syndrome was utilized to predict the bankruptcies of some of the US’ most visible and seemingly healthy public companies. Beginning in 2007, five of the US’s largest brokers including Lehman Brothers had multiple diagnoses of the syndrome in the quarters leading up to the 2008 financial crisis debacle. The video below which is about “The EPS syndrome” includes Lehman.
During the 20 years since he discovered the anomaly, Mr. Markowski has conducted ongoing research on the economic and market conditions for which the anomaly surfaces. Companies tend to become Perfect Shorts during a secular bear market for two reasons:
- Have weak cash flow business models which were subsidized during a bull market.
- More difficult to raise capital during a bear market.
- Accounting gimmickry is overlooked by investors and analysts at the top of a Secular Bull
The table below lists Mr. Markowski’s media verifiable perfect shorts for which Wall Street analysts had buy recommendations. Information about secular bull and bear markets available under the Secular Bull & Bear Markets research tab.
Media Verified Perfect Shorts 2002-2012
*rescued from 2008 crash
The cash flow analytics and tools that were developed by Mr. Markowski enabled him to become one of Equities Magazine’s most read authors. It’s because Mr. Markowski wrote with CONVICTION. His September 2007 Equities Magazine article entitled “Have Wall Street’s Brokers Been Pigging Out?” is a good example. The article was about all of Wall Street’s largest five brokers including Lehman Brothers, Bear Stearns, Merrill Lynch, Morgan Stanley and Goldman Sachs having severe negative cash flow. In the article he stated “I believe that there will be a day of reckoning. It will be sooner rather than later and that day will be ugly for the five large brokers”. One year later Lehman had declared bankruptcy and the four other brokers would have gone out of business had they not been rescued. See EPS/FPS/OPS charts below for brokers and other select companies in Media Verified Perfect Shorts in table above. Apple Inc., chart inserted below to provide frame of reference since it has been a perfect long.
The charts which depicted the diagnoses of the “The EPS Syndrome” that were used to make the predictions for the five brokers in my September 2007 article are available under the “Negative Cash Flow Research” category at BullsNBears.com. See also “About ‘The EPS Syndrome’ and how it was discovered”. The syndrome is utilized to identify short selling opportunities for the shares of publicly held companies only after a Secular Bull market has peaked and the birth of the Secular Bear market has begun confirmed. The end of Secular Bull is the ideal time to enter into a short selling strategy for the following reasons:
- Accounting gimmickry is overlooked by most professional investors at the top of a bull
- Many of the IPOs which occur at the end of a secular bull have weak and unproven business models which produce earnings which have weak or negative cash flow from operations
The gains for the first three years after end of a Secular Bull can be significant. From 2002 to 2004, a subscriber of StockDiagnostics.com was able to turn $50,000 into $2 million from utilizing a put parlaying strategy. The short recommendations will be integrated with the strategies which are available at AlphaTack.com.
For access to the research page for Perfect Shorts go to Negative Cash Flow Research page.