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Long-Haul Short

Raphael Fiorentino
Raphael Fiorentino
26th September 2019 - 2 min read

Thomas Cook is the biggest 2019 year to date contributor to Butterwire’s global index of short candidates. We retrace the nature and timing of insights provided on TCG over the past two years to illustrate the platform’s stock snapshot history feature.

Snapshot History Dates

The continuously robust economic growth expectations (iGDP), and in turn strong equity returns, throughout 2017 and the beginning of 2018 should have benefitted TCG. High financial and operating gearing (ie. high beta), a business model tied to the optimism of the European consumer, constructive fundamentals painted a constructive for the shares over the period, with very high alpha forecasts (> 5%) from Butterwire, boosted by the stock’s extremely high level of controversy (so extreme in fact that the engine labelled it “high octane” over the 2H17). Things started to deteriorate at the very beginning of 2018 and by June a “Check Thesis!” alert was triggered, engaging shareholders to look for fundamental signs of a broken investment thesis (a “Check Thesis!” alert occurs when a stock’s bullish alpha forecast conflicts with its residual 3-month trailing performance).

Check Thesis Alert

Performance Surprise

By July, shortly after the engine downgraded its macroeconomic view from upcycle to downcycle, the alpha forecast plummeted, an “Exit?” alert was triggered, and shortly after its base score bottomed at 0 to remain there all the way to bankruptcy one year later. The evolution of TCG’s alpha forecast and corresponding base score at the start of each month is represented in the graph below, together with the alerts triggered (white triangle = “Check Thesis!”, red triangle = “Exit?”).

Score & Alert History

Overlaying the base score and alert series to TCG’s actual returns (relative to the S&P 350 index) over each subsequent month reveal that a long LSE:TCG position from Jan-17 to Jul-18 generated market-like returns over the period (-0.5% relative), and by the time TCG’s base score had irreversibly dropped to 0 in Oct-18, the shares had started their steady decline toward 0.

Actual Return History

Using the explorer function on the platform to screen the potential shorts globally, we find 180 large-caps, with 44 located in Europe, of which 21 ex-financials, most of which are listed in the screenshot below.

Global Shorts

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