Why One Short-Seller Is Attracted to InfoSpace

Thursday Thwack:

Short story: When I asked Paul McEntire to join me at the RealMoney.com seminar later this month, it wasn't because he's a longtime source. (He isn't.) Or that he's widely known in the short-selling community. (Wrong again.) It was because his relatively new Bearguard Fund is one of only a few public mutual funds that exclusively short stocks. Given the lack of popularity of short-selling, it's no surprise his fund has less than $10 million in assets. "I know that sounds de minimus," McEntire says, "on the other hand, virtually all of my competitors are out of business."

Good point, and with a portfolio of 75 stocks, backed by 11 years experience of shorting stocks in private funds, I figured he had more than just passing knowledge of short-selling. What really hooked me, though, was that unlike many of my sources, who focus on various levels of scams and aggressive accounting, he finds many of his shorts by running quantitative screens that look for extreme ratios.

What about fundamentals? "We mostly look at the fundamentals of losing money," he says. And a catalyst? Isn't there some catalyst that will make your stocks fall? "The main catalyst," he says, "is that every time a company has to announce earnings and sales is a time for people to begin wondering if the stock is overvalued."

Or maybe there has been tremendous insider selling, which is one reason he's short InfoSpace (INSP), the Internet information infrastructure services company (say that three times fast!). Here's a stock, he says, that has a $11.5 billion market cap and quarterly rev of $19 million. "That's an extremely lofty market cap for a company with such small revenue," McEntire says. "Furthermore, they're losing money and insiders have sold something like $500 million in stock. The CEO himself sold 781,000 shares for $110 million. There's nothing wrong, illegal or unethical about doing that, but it just doesn't make any economic sense that the founder is pulling out so much. He could take proceeds from the stock and produce more in revenues than the whole company!"

But with InfoSpace, which is highly promotional, couldn't the stock rise as much as fall? Sure, he says, "but with one-fourth of 1% of my portfolio in it, that doesn't seem too dangerous, and besides, we're willing to wait." To be sure, McEntire has been short CopyTele (COPY), a favorite of short-sellers, ever since he has been shorting stocks. "But that's the exception," he says. "If you're confident that over a five-year period a company will return to the values justified by its sales, then you short the stock."

Whatever works. InfoSpace officials, by the way, didn't return our calls.

From the "truth is stranger than fiction" department: An item Tuesday mentioned Optical Cable (OCCF). It said I left a message for CEO Robert Kopstein just after 5 p.m. Monday. A subsequent item in Tuesday's Hotline mentioned that Kopstein had returned my call Tuesday morning and (as promised!) I forwarded along his comments. Then, this morning, a post shows up on the Optical Cable message boards on Yahoo! Finance, purporting to represent comments from Kopstein. According to those comments, Kopstein says he talked to me Tuesday "and tried to straighten him out." He says that on Monday he was in the office until 9 p.m. with the exception of a stretch from 5:30 to 5:45. "Herb Greenberg could have called me any time." Which I did, at around 5:15. A receptionist said he had gone for the day and wanted to know whether I wanted to go into voice mail. I did. I left a message. He then returned the call on Tuesday.

The question, of course, is whether the statement really came from Kopstein. I called Kopstein yesterday at around 3:30 p.m. and asked whether it really was him. The receptionist said he was on the phone, and asked if I wanted to go into voice mail. I did, and left a message asking if that posting was legit. I followed up later in the day with an email to what the posting purported to be his address. Haven't heard back. (Don't tell me: He was in his office but there must've been some glitch with the voice mail and email systems.)

---

Please join me and Paul McEntire, president of the Bearguard Fund, as we show you why the shorts can help you save your shirt at the first RealMoney.com Investor's Conference. McEntire, a veteran short-seller, started Bearguard last year. It's the first short-only stock mutual fund. We'll both share our tips on how to spot trouble, followed by my questions to Paul and your questions to both of us.

Surviving and profiting in treacherous markets June 28th, 2000, Marriott World Trade Center, New York City

For information and registration, go to RealMoney Conferences.

>To order reprints of this article, click here: Reprints