balance sheet distress which the broader market has not yet picked up. The Swiss–
Swedish engineering company ABB (Figure 2.3) has been a very good short play for
the hedge fund. In the middle of 2000 Browne was looking at what he figured was a
15% premium to the market in the ABB share price. On the surface the company’s
balance sheet looked reasonable; cash had been flowing in from the sale of powergenerating
businesses and the market, says Browne, had difficulty seeing beyond the
money. On his calculation of what the company was earning, the share price looked as
though it ought to be 10-15% below the market. He decided to start shorting the stock.
Browne initially sold the stock at 26 euros and sat in the short position for several years.
The timing was fortuitous for him if not for ABB. He had decided to short the
stock just as the company was pitched into the kind of litigation that would keep any
CEO awake at night. ABB was sued by over 100 000 individuals claiming exposure
to asbestos from boilers produced by a unit of the company. ABB’s share price went
into free-fall as the litigation risk threatened to push the company close to bankruptcy.
After shorting at 26 euros, he closed the short when the price hit 4.50 euros.
At the time of writing, Browne was still actively shorting the Spanish retailer
Inditex: ‘It is the only retailer that still produces its own products. Vertical integration
is wrong for retailers.’ Browne’s beef with Inditex (Figure 2.4) is the group’s insistence
on producing its goods in Spain when there are lower cost centres of production for
clothing, such as China or India. At the time of the company’s IPO in May 2001
analysts hailed the vertical model praising the idea of ‘just in time’ delivery of new
fashions to the stores every two or three weeks. Browne says that the idea is no longer
new and the company’s rivals can achieve the same turnaround by using lower cost
manufacturers. Through the last six months of 2003 the Inditex share price fell from
24 euros to a little over its IPO price of 14.70 euros.
Read More : TRADING SHORT
