Some companies require great gulps of capital to stay alive, even during periods of economic expansion. When operations fail to prime the pump of free cash flow, financial markets irrigate the basic business. To fund a company that goes to the markets routinely, the debt or equity buyer must assume one of two things: that the company will either eventually earn enough money to pay back the obligation or will make a reasonable return on equity or that the assets on the balance sheet will appreciate enough so that the sale will cover the outstanding obligation.
When the market appetite for new debt and equity disappears, so does the company.
When a fundamental change occurs in the business environment, there are two strategies to follow for the short seller: short the marginal company or short the institutional favorite. The institutional favorite is the quality company with good growth, pretty financials and a large number of institutional investors. Insto favorites crash more quickly than marginal companies because the instos all head to the exit at the same time. The marginal company has shaky financials, bad management, and a history of aggressive but often poorly executed business strategies. Problems develop more rapidly when no support exists. The stockholder base is less sophisticated. They are slower to sell, they pay less attention, or even worse they are comprised of friends and family.
Prepaid acquisition costs are costs that the company decided to defer expensing until later.
The most important lesson from Integrated, one that should have been obvious, was that banks and other short term lenders control the destiny of a company that has negative cash flow.
Short maxim: wait to short until reality can be proved, ie. wait until actual earnings come in less than expected.
When the bulls start talking about takeovers - always a good sign for the bears.
The most prevalent mistake of short sellers is that they are often shortsighted about the duration of hope for a new industry and for concomitant stock price decreases.
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