Glenview Capital Expands Short Portfolio ~ market folly

Monday, March 28, 2011

Glenview Capital Expands Short Portfolio

Larry Robbins' hedge fund firm Glenview Capital has recently expanded their short equity portfolio to include more single names (rather than index shorts). Why?

The firm is still seemingly optimistic about equities as a whole and has transitioned money from long fixed income strategies to long equity strategies due to better risk/reward. At the same time, Glenview has also found shorting opportunities in companies that could be negatively affected by the current and impending economic and monetary environment (read: higher interest rates).

Below is an excerpt from Glenview's annual letter where they identify compelling short opportunities in REITs, cruise lines, healthcare, and companies largely reliant on government contracts:

"a) We established short positions in a series of REIT equities whose valuations reflect exceedingly low cap rates proportional to the exceedingly low interest rate environment. We do not believe that our core competency is predicting forward interest rates, but we are exceedingly comfortable betting that over the course of the next year, twelve months will pass. As we examine the term structure of interest rates, a 3.3% 10-year bond yield is comprised of a one year yield of 25bps, and therefore the subsequent nine years average 3.65% (of which the last eight years are 4%). For REITs that reflect a 6% cap rate, a 70bps move over the two years will create 10% multiple compression solely by moving two years forward on the term structure of interest rates. Should inflation accelerate above expectations, this rate rise would be even more pronounced, and the multiple compression more significant. While we don’t expect REITs to implode, we do believe they will underperform over time.

b) We established short positions in cruise lines and other travel related equities that will likely see profits eroded by declining revenue on aging assets combined with inflationary cost pressures including oil. Furthermore, asset intensive travel industries such as hotels are also often valued on cap rates and susceptible to the same valuation compression as REITS, as described above.

c) We broadened our portfolio of shorts in companies that derive a significant portion (or all) of their revenue from government sources whose ability to grow such spending is impaired by their own balance sheet constraints and fiscal deficits. Such companies are likely to see decelerating revenue trends and more intense pricing and margin pressure as a result of the deteriorating financial health of their government and government related customers.

d) In healthcare, we expanded our short positions in companies that we believe will come under more intense pricing and reimbursement pressure as the healthcare reform debate migrates from coverage back towards bending the cost curve."

While most hedge funds don't reveal their exact short positions, they often provide hints. For example, if Glenview is shorting cruise lines, there are only so many players in this space such as Carnival (CCL), Royal Caribbean (RCL), etc. And in the REIT space, a quick valuation screen can narrow down the field somewhat.

A cursory look at Glenview's long portfolio of course reiterates that they already have hefty long exposure in the healthcare sector via McKesson (MCK), Express Scripts (ESRX), Life Technologies (LIFE), and Medco Health (MHS). The first three have been some of Glenview's largest positions for a while now and so it seems their new healthcare shorts are obvious hedges to this copious long exposure.

We recommend reading the full Glenview letter, available via Dealbreaker.

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