Fundamental Short Selling Research

Eric Fernandez, CFA

TwoRiversAnalytics

Equity Bottom-Up

<ul>
<li>This model finds companies facing recent sharp cuts in estimates. These shorts can have very disparate characteristics.</li>
<li>The key judgement involves whether the negative revisions are temporary or if they are indications of ongoing weakness in the business. </li>
<li>Breaking Estimates stocks often continue to decline after the cuts.  This week we flag: Novavax, Micron, Generac, FormFactor</li>
</ul>


This model finds companies facing recent sharp cuts in estimates. These shorts can have very disparate characteristics.
The key judgement involves whether the negative revisions are temporary or if they are indications of ongoing weakness in the business. 
Breaking Estimates stocks often continue to decline after the cuts.  This week we flag: Novavax, Micron, Generac, FormFactor


Breaking Estimate Short Candidates: Novavax, Micron, Generac, FormFactor

<ul>
<li>Our breaking growth model uncovers slowing growth, margin declines, sales and/or earnings disappointments, troubling working capital trends, poor estimate trends or lowered guidance.</li>
<li>These shorts tend to have moderate to higher betas, time horizons of three to twelve months, higher valuations due to historically strong growth and are often “market darlings”.  </li>
<li>The short response, when growth breaks, is based on a downward reassessment of future growth potential frequently aided by multiple compression that accelerates the decline.</li>
</ul>


Our breaking growth model uncovers slowing growth, margin declines, sales and/or earnings disappointments, troubling working capital trends, poor estimate trends or lowered guidance.
These shorts tend to have moderate to higher betas, time horizons of three to twelve months, higher valuations due to historically strong growth and are often “market darlings”.  
The short response, when growth breaks, is based on a downward reassessment of future growth potential frequently aided by multiple compression that accelerates the decline.


Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Index Rebalance

<p>On Friday post market close, S&amp;P Dow Jones announced the results of the March review for the <a href="https://www.smartkarma.com/entities/s-p-500" target="_blank" data-smartkarma-citation="entities:22886:1" rel="noopener">S&amp;P 500 (SPX INDEX)</a> that will be effective after the close of trading on 19 March.</p><p>There are 4 additions - <a href="https://www.smartkarma.com/entities/nxp-semiconductors-nv" target="_blank" data-smartkarma-citation="entities:9801:1" rel="noopener">Nxp Semiconductors Nv (NXPI US)</a>, <a href="https://www.smartkarma.com/entities/penn-national-gaming-inc" target="_blank" data-smartkarma-citation="entities:5588:1" rel="noopener">Penn National Gaming (PENN US)</a>, <a href="https://www.smartkarma.com/entities/generac-holdings-inc" target="_blank" data-smartkarma-citation="entities:16223:1" rel="noopener">Generac Holdings (GNRC US)</a> and <a href="https://www.smartkarma.com/entities/caesars-entertainment-corp" target="_blank" data-smartkarma-citation="entities:15532:1" rel="noopener">Caesars Entertainment (CZR US)</a>. To balance that out, there are 4 deletions - <a href="https://www.smartkarma.com/entities/flowserve-corp" target="_blank" data-smartkarma-citation="entities:20555:1" rel="noopener">Flowserve Corp (FLS US)</a>, <a href="https://www.smartkarma.com/entities/sl-green-realty-corp" target="_blank" data-smartkarma-citation="entities:1548:1" rel="noopener">Sl Green Realty (SLG US)</a>, <a href="https://www.smartkarma.com/entities/xerox-holdings-corp" target="_blank" data-smartkarma-citation="entities:17585:1" rel="noopener">Xerox Corp (XRX US)</a> and <a href="https://www.smartkarma.com/entities/vontier-corp" target="_blank" data-smartkarma-citation="entities:28857:1" rel="noopener">Vontier Corp (VNT US)</a>.</p><p>We estimate one-way turnover will be around US$22.4bn and the funding trade will see selling on a lot of the current index constituents.</p><p>The biggest impact of the changes will be on <a href="https://www.smartkarma.com/entities/nxp-semiconductors-nv" target="_blank" data-smartkarma-citation="entities:9801:1" rel="noopener">Nxp Semiconductors Nv (NXPI US)</a> where we estimate passive funds will need to buy around 11 days of ADV on the stock. The impact on the other stocks is much lower due to the move between the <a href="https://www.smartkarma.com/entities/s-p-500" target="_blank" data-smartkarma-citation="entities:22886:1" rel="noopener">S&amp;P 500 (SPX INDEX)</a> and the S&amp;P Mid Cap 400 indices.</p>

On Friday post market close, S&amp;P Dow Jones announced the results of the March review for the S&amp;P 500 (SPX INDEX) that will be effective after the close of trading on 19 March.There are 4 additions - Nxp Semiconductors Nv (NXPI US), Penn National Gaming (PENN US), Generac Holdings (GNRC US) and Caesars Entertainment (CZR US). To balance that out, there are 4 deletions - Flowserve Corp (FLS US), Sl Green Realty (SLG US), Xerox Corp (XRX US) and Vontier Corp (VNT US).We estimate one-way turnover will be around US$22.4bn and the funding trade will see selling on a lot of the current index constituents.The biggest impact of the changes will be on Nxp Semiconductors Nv (NXPI US) where we estimate passive funds will need to buy around 11 days of ADV on the stock. The impact on the other stocks is much lower due to the move between the S&amp;P 500 (SPX INDEX) and the S&amp;P Mid Cap 400 indices.

S&P500 Index Rebalance: NXPI Is the One to Watch

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>On Friday, the S&amp;P Dow Jones Global Index team <a href="https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20210312-1336360/1336360_march2021-5146-shuf-pr.pdf" target="_blank" rel="noopener">announced</a> changes to the S&amp;P500 Index. </p><div><div><div><blockquote>
<p>NEW YORK, March 12, 2021: S&amp;P Dow Jones Indices will make the following index adjustments to the S&amp;P 500, S&amp;P 100, S&amp;P MidCap 400 and S&amp;P SmallCap 600 to ensure each index is more representative of its market capitalization range. The changes will be effective prior to the open of trading on Monday, March 22, 2021 to coincide with the quarterly rebalance:</p>
<p>NXP Semiconductors NV (NASD:NXPI) will replace Flowserve Corp. (NYSE:FLS) in the S&amp;P 500, Flowserve will replace Edgewell Personal Care Co. (NYSE:EPC) in the S&amp;P MidCap 400, and Edgewell Personal Care will replace Exterran Corp. (NYSE:EXTN) in the S&amp;P SmallCap 600. Exterran is no longer representative of the small-cap market space.</p>
<p>S&amp;P MidCap 400 constituents Penn National Gaming Inc. (NASD:PENN), Generac Holdings Inc. (NYSE:GNRC) and Caesars Entertainment Inc. (NASD:CZR) will all move to the S&amp;P 500, replacing SL Green Realty Corp. (NYSE:SLG), Xerox Holdings Corp. (NYSE:XRX) and Vontier Corp (NYSE:VNT), all of which will move to the S&amp;P MidCap 400.</p>
<p>S&amp;P 500 constituents Broadcom Inc. (NASD:AVGO), T-Mobile US Inc. (NASD:TMUS) and Linde plc (NYSE:LIN) will replace Allstate Corp. (NYSE:ALL), Kinder Morgan Inc. (NYSE:KMI) and Schlumberger NV (NYSE:SLB) in the S&amp;P 100. Allstate, Kinder Morgan, and Schlumberger will remain in the S&amp;P 500.</p>
</blockquote></div></div></div><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/194/535/original/Screenshot+2021-03-15+at+9.22.00+PM.png?1615814543" class="editor-image img-responsive" data-smartkarma-image-id="194535"></figure></section><hr><p>This should lead to US$17.7-21.3bn to buy of the four names based on prices at Friday's close, and US$3.2-3.9bn to sell of the outgoing names. Some of this will be crossed off internally, but a bunch of it will have to trade on the market. </p><p>There are five trading days to get this done, and the average buy is 11-13 days of ADV. The sells are slightly higher. Quiddity estimates are below.</p><section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/194/537/original/Screenshot+2021-03-15+at+9.29.12+PM.png?1615815053" class="editor-image img-responsive" data-smartkarma-image-id="194537"></figure></section><p><a href="https://www.smartkarma.com/entities/penn-national-gaming-inc" target="_blank" data-smartkarma-citation="entities:5588:1" rel="noopener">Penn National Gaming (PENN US)</a> looks like it is the least-impacted by this move at only 4.3-5.1 days of ADV but I remind observers that passive funds will need to own the same percentage of the Voting Rights Float (i.e. if there are 100 shares out and there are 20 shares shorted, there would also be 20 shares additionally purchased on the long side, but the 97.6% float on PENN is 97.6% of 100, not of 120) for all companies in the basket. </p>
<p>PENN's impact in terms of ADV is low because average daily volume is a much higher percentage of float shares than the other companies. </p>
<p>PENN and <a href="https://www.smartkarma.com/entities/caesars-entertainment-corp" target="_blank" data-smartkarma-citation="entities:15532:1" rel="noopener">Caesars Entertainment (CZR US)</a> may end up seeing some non-negligible impact, and substantially higher-than-normal trading volume because of their recent history as speculative vehicles.</p>
<p>Both PENN and CZR trade at somewhat lofty multiples based on last year's EBITDA, but both get to the low to mid teens by two years from now.</p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/194/539/original/20210312+SP500+Inclusion+PENN+CompTable+4.png?1615815530" class="editor-image img-responsive" data-smartkarma-image-id="194539"></figure></section><section class="figure"><p>PENN has tracked an index (equal-weighted, daily-rebalanced) of the above-listed peers reasonably well over the past 12 months, but the 5-year log chart tells you that there have been moments of sustained underperformance. </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/194/550/original/20210312+SP500+Inclusion+PENN+Price+1.png?1615815938" class="editor-image img-responsive" data-smartkarma-image-id="194550"></figure></section><p>It is easier to see this on a chart of the ratio, as below, which suggests that to revisit recent highs against its Peer Basket Index, the shares would have to gain a bit more than 10%.</p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/194/552/original/20210312+SP500+Inclusion+PENN+Ratio+2.png?1615816061" class="editor-image img-responsive" data-smartkarma-image-id="194552"></figure></section><p></p>
<p>Looking forward for the next few years, PENN trades at a slightly higher-than-Peer Basket average EV/EBIT ratio (using current EV and the average of FY+2 and FY+3 consensus EBIT).*</p>
<div class="content-remarks"><p>* Note that the two lines - green and light blue - represent different ways of looking at the same data. The light blue line is the average EV/EBIT ratio across the 10-name basket. The light green line is the average of the sum of the EVs and the sum of the EBITs, averaged over the two years. These two methods are shown because extreme numbers can cause dramatic changes in ratios ($50bn of EV and $100mm of EBIT is a multiple of 500. Move the EBIT to $10mm (a small move in the grand scheme of things) and the ratio moves to EV/EBIT of 5,000x which will impact a ratio of only 10-20 inputs.  </p></div>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/194/555/original/20210312+SP500+Inclusion+PENN+EVEBIT+3.png?1615816220" class="editor-image img-responsive" data-smartkarma-image-id="194555"></figure></section><p>Is this outperformance due to improving forecasts since last summer?  Not really. Kind of middle of the pack. </p>
<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/194/575/original/Screenshot+2021-03-15+at+10.16.39+PM.png?1615817831" class="editor-image img-responsive" data-smartkarma-image-id="194575"></figure></section><p>If one uses the S&amp;P guidance as to tracking funds and the quantity to buy using the pre-announcement price of <a href="https://www.smartkarma.com/entities/tesla-motors-inc" target="_blank" data-smartkarma-citation="entities:20279:1" rel="noopener">Tesla Motors (TSLA US)</a>, there should be $3.2bn of PENN to buy using Friday's closing price. I expect it is more than that.</p>
<p>The options positioning does not seem to be substantial enough to drive a short gamma squeeze but keen observers know, that can change. Existing shorts across the four names could be covered out of care, but it is not clear that will be a big driver either, though the short on PENN is reasonably substantial as a portion of the inclusion buy quantity. There will be considerable crossing within shops as funds trade out of S&amp;P Midcap 400 and into S&amp;P500.</p>
<p>All in all, there are some interesting things to look at in this event. </p>
<p>Conclusions are below the fold.</p>
<p></p></section>

On Friday, the S&amp;P Dow Jones Global Index team announced changes to the S&amp;P500 Index. 
NEW YORK, March 12, 2021: S&amp;P Dow Jones Indices will make the following index adjustments to the S&amp;P 500, S&amp;P 100, S&amp;P MidCap 400 and S&amp;P SmallCap 600 to ensure each index is more representative of its market capitalization range. The changes will be effective prior to the open of trading on Monday, March 22, 2021 to coincide with the quarterly rebalance:
NXP Semiconductors NV (NASD:NXPI) will replace Flowserve Corp. (NYSE:FLS) in the S&amp;P 500, Flowserve will replace Edgewell Personal Care Co. (NYSE:EPC) in the S&amp;P MidCap 400, and Edgewell Personal Care will replace Exterran Corp. (NYSE:EXTN) in the S&amp;P SmallCap 600. Exterran is no longer representative of the small-cap market space.
S&amp;P MidCap 400 constituents Penn National Gaming Inc. (NASD:PENN), Generac Holdings Inc. (NYSE:GNRC) and Caesars Entertainment Inc. (NASD:CZR) will all move to the S&amp;P 500, replacing SL Green Realty Corp. (NYSE:SLG), Xerox Holdings Corp. (NYSE:XRX) and Vontier Corp (NYSE:VNT), all of which will move to the S&amp;P MidCap 400.
S&amp;P 500 constituents Broadcom Inc. (NASD:AVGO), T-Mobile US Inc. (NASD:TMUS) and Linde plc (NYSE:LIN) will replace Allstate Corp. (NYSE:ALL), Kinder Morgan Inc. (NYSE:KMI) and Schlumberger NV (NYSE:SLB) in the S&amp;P 100. Allstate, Kinder Morgan, and Schlumberger will remain in the S&amp;P 500.
This should lead to US$17.7-21.3bn to buy of the four names based on prices at Friday's close, and US$3.2-3.9bn to sell of the outgoing names. Some of this will be crossed off internally, but a bunch of it will have to trade on the market. There are five trading days to get this done, and the average buy is 11-13 days of ADV. The sells are slightly higher. Quiddity estimates are below.Penn National Gaming (PENN US) looks like it is the least-impacted by this move at only 4.3-5.1 days of ADV but I remind observers that passive funds will need to own the same percentage of the Voting Rights Float (i.e. if there are 100 shares out and there are 20 shares shorted, there would also be 20 shares additionally purchased on the long side, but the 97.6% float on PENN is 97.6% of 100, not of 120) for all companies in the basket. 
PENN's impact in terms of ADV is low because average daily volume is a much higher percentage of float shares than the other companies. 
PENN and Caesars Entertainment (CZR US) may end up seeing some non-negligible impact, and substantially higher-than-normal trading volume because of their recent history as speculative vehicles.
Both PENN and CZR trade at somewhat lofty multiples based on last year's EBITDA, but both get to the low to mid teens by two years from now.
PENN has tracked an index (equal-weighted, daily-rebalanced) of the above-listed peers reasonably well over the past 12 months, but the 5-year log chart tells you that there have been moments of sustained underperformance. 
It is easier to see this on a chart of the ratio, as below, which suggests that to revisit recent highs against its Peer Basket Index, the shares would have to gain a bit more than 10%.

Looking forward for the next few years, PENN trades at a slightly higher-than-Peer Basket average EV/EBIT ratio (using current EV and the average of FY+2 and FY+3 consensus EBIT).*
* Note that the two lines - green and light blue - represent different ways of looking at the same data. The light blue line is the average EV/EBIT ratio across the 10-name basket. The light green line is the average of the sum of the EVs and the sum of the EBITs, averaged over the two years. These two methods are shown because extreme numbers can cause dramatic changes in ratios ($50bn of EV and $100mm of EBIT is a multiple of 500. Move the EBIT to $10mm (a small move in the grand scheme of things) and the ratio moves to EV/EBIT of 5,000x which will impact a ratio of only 10-20 inputs.  
Is this outperformance due to improving forecasts since last summer?  Not really. Kind of middle of the pack. 
If one uses the S&amp;P guidance as to tracking funds and the quantity to buy using the pre-announcement price of Tesla Motors (TSLA US), there should be $3.2bn of PENN to buy using Friday's closing price. I expect it is more than that.
The options positioning does not seem to be substantial enough to drive a short gamma squeeze but keen observers know, that can change. Existing shorts across the four names could be covered out of care, but it is not clear that will be a big driver either, though the short on PENN is reasonably substantial as a portion of the inclusion buy quantity. There will be considerable crossing within shops as funds trade out of S&amp;P Midcap 400 and into S&amp;P500.
All in all, there are some interesting things to look at in this event. 
Conclusions are below the fold.


United States

Generac Holdings, Inc. manufactures automatic, stationary standby and portable generators.  The Company's generators serve the residential, commercial, industrial and telecommunications markets.

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Generac Holdings (GNRC US)

Breaking Estimate Short Candidates: Novavax, Micron, Generac, FormFactor

This model uncovers companies facing recent declines in estimates. This week we flag: Novavax, Micron, Generac, & FormFactor

Eric Fernandez, CFA

Breaking Growth Short Candidates

Get a glimpse into our short idea generation process through our Breaking Growth model update. This week: Insulet, Generac, Catalent and Wingstop...

Eric Fernandez, CFA

S&P500 Index Rebalance: NXPI Is the One to Watch

There are 4 changes to the S&P500 with NXP Semiconductors the largest beneficiary of the changes. Estimated one-way turnover is US$22.4bn and there...

Brian Freitas

S&P500 March Rebalance: $18-21bn 1-Way

The S&P 500 March 2021 rebalance sees $18-21bn to buy and 20% of that to sell = a $15-20bn funding sell on Friday's close. A few hours in, I see...

Travis Lundy

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