Moez Kassam got his start shorting stocks back in 1999, while studying for a degree in political science at the University of Western Ontario. He borrowed the Canadian equivalent of about $6,700 from a Russian classmate who had spirited his family’s savings out of his volatile homeland. Kassam’s timing was excellent: He sold short stocks like Pets.com and Mamma.com just prior to 2000’s dot-com crash. His winnings covered his tuition and repaid the 4% loan from his friend. They also changed his schedule: He enrolled in night classes, so he could trade during the day.
Today, the 36-year-old co-manages the Anson Investments Master fund, a Toronto- and Dallas-based $387 million long-short equity hedge fund that has defied the odds by making most of its money via bets that certain stocks would go down. Kassam tries to identify issues in which investors’ “euphoria” has driven prices well above what he believes the companies’ fundamentals can support. “When everyone is excited about something, we usually look at the other side,” he says.
While May and June have been tough for the fund, the strategy has worked well over time. Anson gained 13.4% a year, on average, through June since its founding on the eve of the financial crisis in July 2007, another fortuitous time for short sellers. That’s almost double the 7.2% yearly increase in the Standard & Poor’s 500 index in that time. The hedge fund’s returns, reported by BarclayHedge, are net of its 20% performance fee and 2% management fee (minimum deposit: $250,000).
“We have been making money on the short side in the greatest bull market of all time. Nobody else is doing that,” says Kassam, the son of an Indian mother and a Tanzanian father who emigrated to Canada in the 1970s.
Among his recent successes were short positions in pharmaceutical companiesConcordia International (ticker: CXRX) and Insys Therapeutics (INSY). Beset by debt and other problems, Concordia has lost more than 90% of its value since last fall, while Insys, which is embroiled in several lawsuits over its sales tactics, has slid more than 70% in two years.
INITIALLY USING SOME of his college profits, Kassam has been investing since he graduated in 2002. A friend later introduced him to Bruce Winson, a value-oriented investment professional who’d started a small investment firm in Dallas. The two quickly realized that they could work well together using Winson’s valuation skills and Kassam’s interest in stocks that seem to have gotten ahead of themselves.
They launched Anson Investments Master in 2007, with $8 million raised from friends and family. In their first three years, they also worked with top-performing United Kingdom hedge fund manager Trafalgar Asset Managers, now known as CapeView Capital, whose co-founder Theo Phanos aimed to “remove the emotion in investment decision-making,” Kassam recalls. They ran two nearly identical funds—one served as Trafalgar’s U.S. long-short strategy in a multistrategy hedge fund, and the other was their own.
But in the wake of 2008’s stock market crash, Trafalgar wanted to sever its relationship with outside fund managers. Encouraged by their 14.9% average annual return over three years (they were up 1.8% amid 2008’s stock market disaster), Kassam and Winson in 2010 took advantage of the opportunity by winding down the Trafalgar fund and going off on their own. From Dallas, Winson now runs Anson’s back office and other operations, while making its long picks. From Toronto, Kassam works with 18 analysts to select its short plays.
Two of the roughly 70 positions in which Anson is short are Japanese videogame maker Nintendo (7974.Japan) and police-body camera maker Axon Enterprise (AAXN), both of whose shares have risen sharply, driven in part by news reports. It’s also betting that the stock of Canadian lender Equitable Group (EQB.Canada) succumbs to lower oil and real estate prices. On the long side, the fund owns shares of Greece’s Eurobank(EUROB.Greece), a bank that was devastated in the country’s sharp downturn.
Although most of the fund’s investments are in North America, Kassam sold Nintendoshort after it soared from the yen-equivalent of $225 to $361 from January to early July of this year. The popularity of Pokmon Go, the mobile game that became a global sensation in the latter half of 2016, was responsible for some of the gain. Another source of momentum was the successful launch of the new Nintendo Switch computer game console in March.
Anson is wagering that the stock’s move is overdone. Nintendo, he contends, isn’t reaping nearly as big a profit from Pokmon Go as some investors had assumed it would, because it shares its take with other collaborators. Parts shortages have delayed deliveries of the console, and so Nintendo subsequently postponed until 2018 the launch of a paid online service for Switch.
Kassam estimates that the company’s earnings before interest, taxes, depreciation, and amortization (a measure of cash flow), will come in at $1.9 billion for the fiscal year ending in March 2019, roughly 10% below the consensus estimate of $2.1 billion. He also argues that Nintendo has “a history of poor execution” that could affect cash flow and the stock in the next year or two. His calculation: The shares are vulnerable to a roughly 38% decline, to about $215 from last week’s price of $346.
IN THE CASE OF AXON ENTERPRISE, which was known as Taser International until April, Kassam noticed that its stock price tended to jump with sensational newspaper headlines about police shootings, starting with the one in Ferguson, Mo., in 2014. The reports seemed to prompt investors to buy on the theory that more police departments would require officers to carry Axon’s products, mainly the Taser-brand electric stun guns they use for less-lethal purposes, and the body cameras that police increasingly wear.
Kassam, however, thinks that stun-gun sales generally have reached a “mature” point and won’t grow much further. More importantly, he sees Axon facing stiff competition from other makers of body cameras. For example, Vievu, a private company, last year won a $6.4 million contract to supply the New York Police Department with the cameras, after the department declined Axon’s offer of free cameras for a year because it didn’t comply with its procurement rules.
Anson’s team of analysts calculated that Axon’s Ebitda for 2017 at $30 million, or nearly 12% less than the consensus estimate of $34 million. From its recent $25 a share, he foresees about a 25% drop toward $18 and change.
Like a number of short sellers, Kassam is wagering that Canada’s banks aren’t adequately reserved for a rise in mortgage delinquencies, as home buyers fall behind and corporate-loan defaults rise from borrowers in the oil patch that have invested to expand their businesses. In March, Canadian home prices were 30% above their year-earlier level, but by June, they were 6% below their May level. When oil was above $100 a barrel, that helped prop up local real estate values, but since June 2014, prices have plunged from about $105 to $49.
One financial institution that he’s shorting is Equitable Group, which has a loss provision of just 0.02% of its total loan portfolio. He believes that leaves it unprepared for a potentially big drop in real estate values. Equitable has 30% of its debt exposure in Alberta, a province where much of the economy depends on oil. Borrowers whose fortunes are pinned to the growth of the energy industry—whether they be pipeline workers or shopkeepers who sell to them—will find it tougher to meet monthly mortgage payments or repay corporate loans, Kassam says. He projects a decline of 25% or more in the shares.
With Winson leading the way, Anson’s 25 long positions are mostly in S&P 500 stalwarts like Microsoft (MSFT) and Vulcan Materials (VMC), or in options-related hedges for the fund’s short positions. They usually represent “an insurance policy,” says Kassam, against the possibility that his short bets go sour.
But that’s not always the case, and long positions have grown more important of late, as stocks post one sharp rally after another. Often, the stocks that are rising have been beaten down by bad headlines for a prolonged period, obscuring an improvement in fundamentals.
One example is Greece’s Eurobank, which suffered from “the opposite of euphoria” after it wrote off billions of dollars in bad loans. Winson and Kassam believe that the Greek government is gradually bolstering its economic relations with the rest of Europe and the restructured bank will benefit. The Greek economy grew in the first quarter, and just last week, Greece had a successful bond offering. He thinks the bank’s stock can get back to its book value of 2.58 euros ($3) a share from its recent 92 European cents.
Although they haven’t bought its shares, Winson and Kassam have looked at Macy’s(M), which has fallen nearly 65% in the past two years on sales and earnings disappointments and continued threats from online retailers. Even if the retailer’s business drops further, Kassam asserts, the stock eventually will reflect more of the estimated $18 billion value of prime real estate that Macy’s has in New York, San Francisco, and other cities.
As much as he offers very precise forecasts on where individual stocks might come to rest, Kassam doesn’t predict where the S&P 500 is headed. He just believes that it can’t keep climbing indefinitely. The stock market’s advance in May and June has been costly to Anson, which lost nearly 9% in that span and gave back previous gains made this year. Kassam acknowledges as much: “Today, everybody thinks making 10% to 15% is easy, but it is a tough road ahead.” In the meantime, he maintains, the best “insurance policy” for investors is a hedge fund that will still be making money when the music stops.