James Montier May 2008 Memo: Joining the dark side: Pirates, Spies and Short Sellers

What should you look for in a good short candidate? A superficially easy question, but one that most analysts don’t seem to like to answer. A fact evidenced by a mere 10-15% of recommendations being sells! We examine three factors that seem to add up to a pretty good indication of a shorting opportunity. Essentially we look for expensive stocks, with deteriorating fundamentals and poor capital discipline. This ‘unholy’ trinity results in a basket that has historically declined around 6% p.a. Running the screen today reveals the highest ever number of stocks passing the shorting criteria. Perhaps it is time to join the dark side.