One of the most important disciplines in this game is knowing when to do nothing and until the UK election is out of the way I think it is wise to stay on the sidelines. My political predictive skills are far from perfect and while Johnson is fortunate to have Corbyn as an opponent and ought to gain an overall majority, which would almost certainly trigger a rally in sterling and the beaten up UK-based companies, I am happy to wait for the result before acting. The gulf between left and right both here and in the US is so huge that the idea that decent companies will prosper whatever the political outcome no longer holds good. As for the short side, as is usual at the tail end of a long bull market, the market is extremely tolerant of frauds and over-promotions which is extremely frustrating for bears...
It’s nice to be finally vindicated, for instance, on PureCircle (PURE), but profoundly depressing that its accounting shenanigans were committed in plain sight for years before any action was taken, despite my and others’ repeated warnings. Until this changes, the best game to play now on the short tack, in my opinion, is to look for names where bankruptcy or massive equity dilution is a near certainty.
This entails shorting names that have already fallen by significant amounts and often involves extreme volatility in the final months as rumours often abound of various hopeful scenarios. Thomas Cook is the perfect example here, nearly doubling at one point in its final month from 5p to 10p as some crazy Turk bought a load of stock.
As I have said many times before, the price of a company's debt is a very good indicator of whether the equity faces wipe out or dilution. The debt of Sirius Minerals (SXX) trades in the mid 30s, which effectively means that should any prospective “partner” in this ridiculously grandiose project be misguided enough to commit $600 million upfront to the project - which is what the company now claims it urgently needs (before the real spending begins) - it is inconceivable to me that the current shareholders would be given a free ride for £240 million, which is the market cap at 3.42p. This makes the shares a strong sell at these levels despite possible volatility before the inevitable occurs.
This article first appeared on the N50 website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website ahead of the next share tip from Tom & Steve and a new shorting piece this week click HERE
Filed under: Sirius Minerals, PureCircle, MRS, Micahel Infante, Verseon, Xeros, Neil Woodford, N50
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