Greenberg: What This New Short-Only ETF is Shorting

One part of the ETF (exchange-traded fund) story that hasn’t gotten much attention, actively managed ETFs.

Unlike most ETFs, which are really nothing more than an index, actively managed ETFs are just that—actively managed by a manager who is trying to beat the market.


So far there aren’t many—likely less than two dozen—but expect to see more.

And regardless of whether you think they’re a good idea, the Advisor Shares Active Bear ETF

is as interesting and close to unique as it gets: A concentrated portfolio of several dozen shorts culled through forensic research. Like all ETFs, its portfolio is posted at day’s end.

“Our biggest and most profitable strategy is finding companies with accelerated revenue recognition,” says portfolio manager John DelVeccho, whose pedigree includes working with David Tice at the Prudent Bear Fund and Howard Schilit’s Center for Financial Research and Analysis.

“We try to allocate capital across many companies to spread risk, but concentrate our bet in the same underlying concept—aggressive revenue recognition. Usually it's not possible to have 30 of these stocks at the same time because it's not always easy to find. So, for example, we may have a company in there with questionable cash flow trends.”

Among his current favorite shorts:

Juniper Networks, whose rising stock leaped after reporting earnings Tuesday. “It adopted a revenue recognition change, which has accounted for 20 percent to 30 percent of their growth. They're growing closer to 18 percent than 26 percent reported figure and below guidance on a sustainable basis.

They would have missed earnings in June and September of last year by about 10 percent each quarter absent the change. They don't disclose the impact of the change in the call, but it will be in the filings. It's material.

In addition, the company had a nonlinear quarter which means sales were weighted to the end. Often, that includes incentives and extended payment terms. Receivable days outstanding are up. The impact of the revenue change could be 20 cents or more—and estimates are around $1.55."

AsiaInfo-Linkage , a Chinese telecommunication software company. “It's been a weak stock with relative strength of just 3. So, it would probably be down more if the market were a little more conducive to shorting over the last seven months.

China is either the greatest growth story ever or the biggest Ponzi scheme. ASIA has been generating a significant amount of growth from unbilled accounts receivables, which is based on an estimate by management. They can also overstate the margin.

When gross margin was going up you could tell Wall Street analysts couldn't figure it out, but it was a good thing, right? Not really—since it was all a mirage. The company has bombed twice now since then, margins have been hammered, but the growth is still vulnerable as they stole a lot from the future.”

Bally Technologies , which makes slot machines—a longtime bull/bear tug-of-war stock. “Customer deposits are falling, new projects stalling, deferred revenue falling with the new deal pipeline slowing, receivable days sales outstanding are up. They missed last quarter and back loaded their year.

I love those stories because it seems like the growth never quite comes back in the second half of the year. We think with the days sales that the extended payment terms are causing the company to have trouble finding new sources of revenue to fill the gap they created."

The portfolio includes other names that aren’t strangers to regular readers, including and Green Mountain Coffee.

My take: Shorts aren’t always right, but they raise red flags—ambitious and aggressive revenue recognition, among them. Never thought I’d live to see the day a short-only fund would bear its portfolio—daily! Must have thick skin.

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