Friday, August 24, 2007
The Washington Post Says “Global Alpha Male Quant Crisis Over!”
Well, the crisis roiling the “quant” hedge fund community is officially over—or, at least, on hold—according The Washington Post.
No, I’m not talking about the newspaper Washington Post, which I never read, and which I doubt has ventured any opinion about whether or not the quant crisis that forced bizarre, mechanical short-covering and bizarre, mechanical long-selling of individual stocks by computers in the early days of August, the likes of which I’ve never seen, is over.
But the stock Washington Post is certainly looking that way.
Now, for starters, the Washington Post Company (ticker WPO) is not your typical fast-money trading vehicle. In fact, it is probably one of the very last stocks you might ever dream of being caught up in some Goldman Stanley Stearns & Lynch Global Alpha Male Hedge Fund, LLC disaster.
First, there are only 7.8 million shares outstanding, and most of them are owned by Berkshire Hathaway and fans of Berkshire Hathaway—the ‘Never Sell’ crowd we studied in our “Pilgrimage to Omaha” series early this summer.
As a result, average daily trading volume in the Washington Post is a less-than-whopping 16,000 shares. Most publicly traded companies trade 16,000 shares before the lights go on in lower Manhattan.
Second, the business of the Washington Post is sound, if not spectacular, and by no means cyclical. And while you might think the Washington Post would be a good short-selling candidate along with the rest of the newspaper industry, it is in reality not a newspaper company any more.
Just 20% of the company’s business is the old-media newspaper and Newsweek; 80% is television stations, cable TV, and the educational provider Kaplan. In fact, of all major newspaper chains, only E.W. Scripps has moved as aggressively away from its origins as Washington Post.
Consequently, WPO is one of the few publicly traded newspaper chains showing revenue growth and healthy profitability.
Third, WPO’s shareholders—and I have been in this category—tend to own the stock to have and to hold, not to flip. Consequently, the stock itself, thanks to the patient shareholder base and recession-resistant nature of its franchises, has a “beta” of only 0.57.
For perspective on that number, “Beta” is a measure of a stock’s volatility. A stock that moves up and down in line with the overall stock market is said to have a “beta” of 1.00.
A more volatile stock would have a higher “beta” than the market. Google, for example, has a “beta” of 1.24, which means Google’s share price tends to be 24% more volatile than the overall market, thanks to the company’s young, fast growing, risk-taking culture.
Consequently, at 0.57, the Washington Post has the “beta” of a corpse.
Thus, with a reasonable business model, limited float and low “beta,” the short interest in WPO has been virtually non-existent.
Until late last year.
That is when the stock’s short interest began rising steadily—roughly 10% each month—from a mere 50,809 shares in August, reaching 100,000 in June and jumping to 119,193 in July. Thus the shorts more than doubled their position in less than a year.
The stock, meanwhile, went, slowly and fairly steadily from $740 per share to nearly $800 during the early summer months, while the company itself was also doing fairly well, all things considered, despite normal quarterly earnings fluctuations which are to be expected in a company with Warren Buffett—who abhors quarterly earnings management—on the board.
Then, on August 3rd, the company reported earnings that meant nothing much in the scheme of things—and yet the stock made a Google-ish 60-point move to a high of $850 on four-times the normal average volume, closing up 4% $825.50 a share.
The only possible explanation at the time was that since Rupert Murdoch had just won approval from the Bancroft family to buy Dow Jones, he might also pay a stupid price for the Washington Post.
But there was no follow-through in the shares, which settled down the next day and the next, and went back under $800.
They erupted again on August 8th and 9th (a down 350-point day on the Dow) hitting $880 a share on six times normal volume, only to settle back below $800 on the 10th .
Meanwhile, other stocks with similar characteristics—high price/earnings ratios and high short interests—were likewise jumping, and it became clear something other than a Rupert Murdoch rumor was driving the stock.
To whit, some Global Alpha Male Quant Fund, LLC was covering a short position, very badly.
And sure enough, when the short interest data (which for reasons I have never understood, is tallied on the 15th of each month) came out this week, it showed the short interest in the Washington Post had suddenly stopped going up.
In fact, the short interest declined modestly. And I suspect September’s numbers will show a further decline, as whatever Global Alpha Male Quant Fund, LLC finishes its business.
Or perhaps the Global Alpha Male etc. LLC’s computer will decide to look through the Washington Post annual report and see what kind of business it has been short, and who is on the board of directors and what the long-term value of the enterprise might be...and instead of buying high after selling low, will hang onto the shares for the long term?
I Am Not Making This Up
© 2007 NotMakingThisUp, LLC
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.
Posted by Jeff Matthews at 8:37 AM