Short sellers are longing for Rouse to fall

VIEW FROM WALL STREET

August 11, 1991|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

New York -- The best thing employees of the Rouse Co. could do to please some of its most active investors is have a lousy day.

The paradoxical position stems from an intense skepticism about the company's prospects by short sellers. These speculators sell shares they don't own, on the premise they will be able to purchase them at a later date for less. Thus, the investors make money if the stock's price falls.

Lots of companies fail to capture the affection of investors, but it takes a special company to arouse the interest of shorts. Something dire (and imminent) must be afoot.

In Rouse's case, it isn't hard to find. The Columbia-based company has two core businesses, property development and retailing, and a financial structure that includes debt. It's an unpopular combination.

Short sellers can be wrong. In fact, shorts have collectively lost more than $30 million on Rouse stock since last October. At the time, the company's shares were selling for 10 7/8 . Now, they sell for 18.

Rouse has more than its share of fans that project those gains into the future. It is a classy operator, and security analysts at two local firms, Alex. Brown & Sons and Ferris, Baker Watts, are optimistic.

Still, the opinion of short sellers shouldn't be ignored. They back their skepticism with their own money in a business where money is often a measure of sincerity.

Moreover, in the case of Rouse, short sales have been a notable, if flawed, leading indicator. A significant short position in the company's stock became evident in October of 1989 when, perhaps not coincidently, the company's shares were peaking at 29 7/8 . Earnings had already begun to slide.

Actions by short sellers got a lot more press at the beginning of the century. Jesse Livermore, the so-called "boy plunger" of Wall Street, was credited with causing the crash of 1907. His every move attracted interest and, often, public condemnation, as if the market revolved around his whim.

More recently, the reputation of short sellers has improved, especially in the wake of the overheated 1980s -- when Wall Street was faulted more for inane optimism about dicey securities than for skepticism about sound companies. Business school academics now are more likely to suggest that shorts provide a sobering impact on markets, deflating bubbles before they become truly dangerous.

They also seem less mysterious. Although the names of short sellers remain private, aggregate positions are published monthly by the three major exchanges. Thus, the overall short position in Rouse isn't a matter of rumor, but fact. Numbers compiled by the National Association of Securities Dealers indicate that as of July 15, 3.9 million shares of the company were sold short, the third-largest short position among over-the-counter companies. It has recently been increasing, having declined to 3.7 million shares in May from 6.2 million shares last October.

The size of these short positions is particularly large given the amount of shares available. Rouse reckons a stable group of 50 shareholders controls 80 percent of its stock, or about 38 million of the 48 million shares outstanding. That means more than a third of the tradable shares are currently sold on loan.

While that suggests the depth of the pessimism, it also suggests how explosively Rouse's share price could rally if sentiment turns. A fast rise could force an intense scramble among shorts to find shares to cover their positions. "When the shorts start running," said Robert Frank, an analyst at Alex. Brown & Sons, "it will be a small door."

Will they? That depends on one major question -- the overall economy -- and several smaller ones contained in Rouse's financial statements.

A broad economic recovery would boost both retail sales and property sales in Columbia, where Rouse has vast holdings. January was a disaster for the retailers in stores in Rouse's malls, with same-store sales falling 8 percent. Since then, the company says, they have been up about 2 percent each month, and comparisons with last year will become more favorable because the second half of 1990 was poor. Meanwhile, Columbia sales did well in the first quarter.

That encourages investment analysts. "You have a classic struggle between long-term holders of well-managed, well-financed and well-located real estate vs. people looking to a short-term aberration due to the economy," said Clifford Ransom of the institutional research department of Ferris, Baker Watts. "In the end, wisdom will prevail."

Perhaps. Some economists, though, foresee a "double-dip" recession, with the economy sinking once again. And even if the economy remains at its current level, there are questions about how Rouse is doing. Based on net income, Rouse lost money last year and probably will lose money this year.

The company doesn't like to use net income, arguing that earnings before depreciation and deferred taxes more accurately portrays its condition. This measure has been positive and rising.

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