The Active Bear Strategy: Because hibernation is bull!
About the Strategy
The Active Bear Strategy has a two pronged approach to short selling:
- "Core" fundamental positions are established based primarily on earnings quality analysis, and consist of positions that have been filtered through our short model.
- "Tactical" trading positions are utilized to add exposure in bull or bear markets, which assist the portfolio in circumnavigating volatility.
The combination of both core fundamental positions and tactical trading positions seeks smoother performance and consistent alpha. As market conditions change, tactical trading opportunities adapt while the core fundamental positions can remain in the portfolio without fully exposing it to dramatic movements in the equity markets. When evaluating candidates for the portfolio, the portfolio managers take into consideration the following:
- Hierarchy: The team ranks a company’s warning signs in direct proportion to where they reside on the income statement. The higher up the warning sign, the greater the concern for the company.
- Revenue: This is the highest concern. If revenue is fictitious, then the entire financial model for the company is questionable.
- COGS/Gross margin/Operating profits: The portfolio managers look for unsustainable sources of margin expansion. For example, analysts will often cheer a company that creates a reserve in one quarter and then reverses it the next period. Writing off inventory in one quarter and then selling it the following quarter creates a 100% gross margin profit boost. However, rising margins attributable to accounting maneuvers like this are not generally sustainable.
- Ratio Adjustments: A company’s adjustment to P/E, P/CF, and/or P/S may indicate questionable accounting issues.