Paul Wick recently told clients his team has been “extremely active” on the short side over the past few months.
“Many names have done well for us while others have been painful,” wrote Wick, who heads up the Seligman Tech Spectrum (Master) Fund, in his second-quarter client letter, obtained by Institutional Investor.
He stressed he is content to run the fund with a “somewhat lower net exposure than usual” for a number of reasons, including the uncertainty of the U.S. election, the weak global economy, and elevated valuations in many parts of the market. The fund was up 12.34 percent in the first half of the year and was 100 percent long and 50 percent short as of July 31, the date of the letter.
Unlike most hedge fund managers, however, Wick doesn’t discuss his short strategy only in general terms. Rather, he discloses the specific stocks he has shorted as well as the stocks the fund is currently short. Wick declined to comment.
For example, in the second quarter Seligman initiated a short position in AI infrastructure and chip company Astera Labs, which went public in March. Wick said he flipped his “modest” IPO allocation at $36 for a quick first-day gain in the $50s, then went short when the stock moved up to the high $60s a few weeks later.
“Astera is an exciting story, but the valuation was egregious above $60,” he explained. “We figured that Astera’s valuation would eventually calm down, as investors became less bullish about AI or feared an impending lockup release of shares owned by insiders this fall.”
He was right. The stock recently sold off in the mid-$50s, where Seligman covered its short “for a solid gain.” Wick also said the fund reshorted plant fuels pioneer Aemetis “on a violent spike in April” and then covered it 30 percent lower in May “when shares cooled off.”
Other shorts it closed out with a gain during the second quarter were: Equinix, which specializes in internet connection and data centers; Harmony Biosciences, a narcolepsy drug company; Affirm, a “buy now, pay later” consumer finance company; Qualys and Fortinet, two cybersecurity software companies that posted weak first-quarter results; Plug Power, “a perennial money-losing” fuel cell company with negative gross margins; Inspire Medical, the implantable sleep apnea device company, which blew up “on disappointing guidance, a high valuation, and fears that weight loss drugs would erode new patient interest in surgical implants for sleep apnea”; CoStar Group, a provider of commercial real estate data, which was hurt by the weak commercial real estate market; AMC Entertainment, a movie chain meme stock that collapsed over the past two years, when Seligman was short; Remitly, a money transfer provider that sank on disappointing results; Vicor, a supplier of power modules; Zscaler and Snowflake, software companies with high valuations; biotech company 4D Molecular Therapeutics; Paycom, a payroll software provider that posted disappointing guidance; and Pool Corp, a leading distributor of pool equipment that finally cut guidance in light of weak demand.
At the beginning of the third quarter, Seligman reshorted Pool after its stock surged. “Pool prices have doubled over the past four years, and pool construction is also depressed by the lack of real estate transactions in the wake of elevated mortgage rates,” Wick explained, adding he doubts that a slight drop in interest rates will suddenly reignite consumer demand for pools.
Seligman also recently reshorted Equinix, noting the stock rebounded to where the firm previously shorted it “in response to the board ‘investigating’ the accounting allegations and providing an ‘all clear.’” Wick said his team remains skeptical of the company and its board.
He also disclosed it recently established new short positions in old favorites. They include Appian, which Wick calls “a loss-making software company with atrocious financials and an egregious valuation.” Sunrun and Sunnova Energy are solar power companies that Wick believes are possible bankruptcy candidates. And he is shorting Apellis, whose drug for macular degeneration is “not surprisingly” losing share to a competing drug from Astellas.
The other new shorts are Dycom Industries, a fiber installer for the telecom industry; and AST SpaceMobile, a satellite company working to provide broadband service directly to phones. Seligman also established new short positions in two established satellite companies that Wick says “face a difficult future”: EchoStar and Viasat.
Wick explained that EchoStar has $25 billion in debt and is burning $800 million per year, with debt maturities this November “that it likely can’t pay.” He said, “We are optimistic that EchoStar is headed to bankruptcy court this fall.” He notes that Viasat has too much debt as well, with a capital-intensive business burdened by putting expensive new satellites into space. “They also face increasing competition from cheaper low-earth orbit satellites from Elon Musk’s Starlink,” Wick adds.
Seligman shorted Japanese semiconductor equipment supplier Lasertec after a former colleague published a long report asserting the company is fraudulent. “We don’t know if Lasertec is indeed fraudulent, but the company has a lot of red flags, including heavy customer concentration (Taiwan Semiconductor Manufacturing, Samsung, and Intel are more than 90 percent of revenues), volatile quarterly results, weak free cash flow despite purported strong profits, enormous inventory build, recent turnover of both the CEO and CFO, an auditor change, elevated valuation, and potentially difficult new competition in their main product from KLA Corp, the leader in deep ultraviolet mask inspection,” Wick adds.
He noted that Lasertec is currently a top-five short position. But the firm’s worst short is electric car maker Tesla. Since late April, the stock has surged nearly 60 percent.
“It’s difficult to understand why the stock has been resurgent after selling off hard due to weak sales, declining margins, ongoing cash burn and inventory build, high valuation, and a stale product lineup,” Wick insists.