“The traditional red flags don’t work so well. Expensive stocks can get more expensive and balance sheets don’t matter when cash is free,” Mr King said. “We’re more trading-oriented on the short side than we traditionally have been.”
A small short position earlier this year in GameStop, a company that became the centre of a fight between retail traders and a hedge fund betting on the company’s demise, typifies the refined approach.
Shares in the US computer game retailer soared 1700 per cent in the first few weeks of January as retail investors rushed into the stock, but have since flickered 44 per cent lower.
The initial jump spurred short-sellers to exit, sending shares even higher, while brokers serving short-sellers that remained were also compelled to buy the stock to cover short positions for fund manager clients.
This so-called “short squeeze” dynamic pushed the shares skyward, offering a chance for other short-sellers to load up on bets that price would eventually fall.
“We see things like GameStop where there is a huge short squeeze as an opportunity to short some shares,” Mr King said.
The sharp increase in global share prices combined with a rush to the markets from retail investors has created a tough environment for short sellers akin to the giddy days of the dot com boom, Mr King said.
“A lot of people got hurt in the tech bubble in 2000 shorting shares but the aftermath of the bubble was probably the best time for me on the short side,” he said.
“When the bull market finally ends there will be some great opportunities but for the moment it’s good to be cautious,” he said.
King is one of Australia’s best known investors and was inducted into the Australian funds management hall of fame two years ago. He will appear at the Sohn Hearts & Minds conference on Friday to present one of the only short stock picks at the event.
The conference raises money for charity and has attracted big names across the global investment management industry, including Charlie Munger, right-hand-man to Warren Buffett, who will headline the day.
As short selling has become more difficult, Regal has turned one of its successful short positions over the past few years into a long holding.
Regal held a short position in AMP through the wealth manager’s woes that have included revelations the company charged deceased former customers for financial advice they did not receive.
AMP shares have lost three quarters of their value in the past five years and slipped below $1 for the first time this year, touching a closing low of 92¢ in September.
Regal purchased shares in the “mid-90¢,” according to King in a bet that new chief executive Alexis George can turn the company’s fortunes. AMP shares have climbed 6.5 per cent from the lows.
“We were short for many, many years and we think the new CEO is doing all the right things and it’s the start of a turnaround story,” he said.
“People think the situation is worse than it…
Read More: Regal’s Phil King shorts GameStop in tactical shift