Two Ripe Perfect Shorts

Michael Markowski  |

Since the shares of both Titan Machinery (TITN) and Conn’s (CONN) have recently spiked due to short covering rallies after hitting new 5-year lows earlier this year I am taking this opportunity to reiterate both of my perfect short recommendations. My prediction is that both of the billion-dollar-plus revenue-generating companies will file for bankruptcy by the end of 2016 or during 2017 at the latest. In 2014, I had designated both companies as “perfect shorts”.

The two companies have been able to hind behind the bull market and the significant short interest in their shares to avoid their final capitulations. Since I believe that the US entered into a bear market last May when the major indices reached their all-time highs and that the probability of a market crash has increased because of Japan’s instituting of a NIRP earlier this year the fate of both of these companies has been sealed. See “Japan’s NIRP Increases Global Market Crash Probability”.

Any company that I deem a “perfect short” is different from a company for which I make a “sell” or a “short” recommendation. The destiny of a perfect short is bankruptcy and a share price of zero. My criteria for application of this definition to any company is that it manifests 10 characteristics.

My analyzing Enron’s collapse and observing the demise of Suprema Specialties in 2001 was the origin of my “perfect short” designation. In 2002 I unearthed 10 companies manifesting perfect short characteristics. Among these were AstroPower, MCSI, and Fleming Companies, Inc., formerly the largest food distributor in the U.S., which had over 18 billion in annualized revenues and had paid dividends for 85 years. I was successful in predicting all of their bankruptcies and watched their protracted collapses. This occurred while they were all listed on the NASDAQ and were being recommended by Wall Street analysts, which was my impetus for classifying this "subspecies" as the perfect short. (Please see Forbes, “Markowski Goes With the Flow”.)

During the 15 years since I discovered this subspecies and have been monitoring it, I also discovered the conditions under which they surface. Perfect shorts consistently emerge within mid- to late-stage bull markets. In 2007 I recommended to my Equities Magazine readers to exit their holdings in a half dozen to a dozen companies, including Lehman Brothers, Bear Stearns and Merrill Lynch because they met all of the perfect short qualifications. (Please see my September 2007 article “Have Wall Street’s Brokers Been Pigging Out?”.) Perfect shorts thrive in a roaring bull market environment where investors focus on growth instead of value and free cash flow.

When I found Conn’s and Titan Machinery in 2014 — both heavily owned by institutional investors — it necessitated that I come up with the nomenclature to distinguish these high-risk companies that were generating paper profits and negative cash flow, thus my “perfect short” label. (Please see my 2014 reports, “Conn’s Has Been Deemed a Perfect Short”, and “Why Titan Machinery is a Perfect Short”.) Similar to Titan Machinery and Conn’s, all companies that met my 10 perfect-short qualifications were heavily owned by savvy institutional investors who lost from hundreds of millions to billions of dollars upon their bankruptcy filings or shotgun marriages.

I neither relish deeming a company a perfect short, nor have I ever profited or attempted to profit from any of my perfect short recommendations. Rather, I offer my research as a public service because a company that has reached the critical perfect-short stage can produce catastrophic financial consequences that undermine the confidence investors have in the stock market. The perfect shorts that I find are posted on and my ongoing research on them is freely provided to the public.

My recognition of the existence of the subspecies that would become known as a “perfect short” evolved from my discovery and classification of the “EPS Syndrome” when conducting a post mortem on Enron following its bankruptcy. (Please see Inc. Magazine, “High Concept: How to Spot an Enron”.) Having at least two prior diagnoses of the EPS Syndrome is one of the 10 attributes required for a company to be deemed by me “a perfect short”. A chart depicting Conn’s multiple EPS Syndrome diagnoses and a video explaining Titan Machinery and other perfect shorts is available in my initial Conn’s report.

There are two key common denominators present in every perfect short that I have discovered:

  • The company has a business model that generates both paper profits and negative cash flow from operations (CFFO).
  • A perfect short company is completely dependent upon having access to an ever-increasing line of credit or equity enabling it to sell and increase the volume sales of products to customers.

The expanding credit that a perfect short obtains access to enables it to grow revenue and paper profits in lockstep with the increasing availability of debt capital. When the credit line stops growing, the company’s revenues cease to grow. As this happens the company’s “house of cards” business model becomes exposed. Revenues begin to contract and paper profits turn into to cash losses. At this point a company’s fate is sealed. Because of the company’s reversing and rapidly deteriorating financials, it becomes a pariah and is thus unable to attract additional debt or equity capital. Wall Street analysts subsequently downgrade the company’s shares from ‘buys” to “holds” and “sells” and existing shareholders begin to sell their holdings. Even worse for such companies, creditors become hostile and force the company into bankruptcy. Because the management of a perfect-short company will do almost anything to prevent the share price from collapsing, cases where desperate measures have been taken are in evidence. Exemplifying such a measure is MCSI announcing a buyback even though it did not have the cash or cash flow to purchase its own shares, then utilizing borrowed funds to purchase its shares just prior to its bankruptcy filing. It is quite common for the executives of a perfect short to be charged and convicted of fraud after the company collapses and its share price hits zero. The executives of the Fleming Companies and AstroPower were charged civilly with fraud by the SEC. The executives of Enron, MCSI and Suprema Specialties were criminally charged and sentenced.

Another key attribute of a perfect short is the company’s reporting of record profits for at least two consecutive fiscal years in its recent history. The perfect short’s share price must have also traded at near their all-time highs during the same period. The paper-profit-dependent business model of a perfect short is insidious. It enables a business to easily report the record profits that can lure the savviest to invest and analysts to have “outstanding buy” recommendations on a perfect short. Perfect-short Enron is a good example. When it filed for bankruptcy there were 11 Wall Street analysts who had “buy” or “strong buy” recommendations on its shares. (Please see Forbes February 27, 2002 article. For easy access, copy and paste the headline, “Enron Analysts: We was Duped” into Forbes search bar via this active link.)

The optimum time to invest in a perfect short is not when a company is reporting increasing profits and its share price is heading to new highs. The ideal time is when a company has gone from reporting increasing revenues and profits to reporting decreasing revenues and losses, and/or when the shares of the particular company are consistently trading down to new multi-year lows instead of hitting new highs.

The shares of Titan Machinery are ripe for a collapse. The company’s annualized and quarterly revenue projections have been declining since fiscal 2014 and are projected to decline for the foreseeable future. The company reported its first-ever loss as a public company for its 2015 fiscal year and is projected to have losses for its 2016 fiscal year. Titan’s share price was most recently trading at a 5-year low.

The shares of Conn’s may be even riper for a collapse than are the shares of Titan Machinery. Conn’s share price and market cap is much higher than Titan’s because of Wall Street’s more bullish position on Conn’s. However, cracks have begun to surface. The Wall Street firm Stifel, which had been one of Conn’s cheerleaders, lowered their rating on its shares from “buy” to “hold” after Conn’s announced that its same-store sales declined by 5% in December. The chink in Conn’s armor is telling. (A month and a half before Enron filed its bankruptcy petition 11 of the 15 Wall Street analysts covering Enron had either “buy” or “strong buy” ratings on its shares.) Since Conn’s January 7th announcement Conn’s share price fell by 33% from $20.53 to a new 5-year low of $13.18 on January 15, 2016. Additionally, based on Conn’s last balance sheet filed with the SEC the company’s financials had begun to rapidly deteriorate. As of October 31, 2015, Conn’s total liabilities exceeded its total accounts receivable. This will make it extremely difficult for Conn’s to borrow the additional capital that it needs to continue to inflate its paper profits.

The increased volatility of the stock market since the start of 2016 has resulted in the U.S. stock indices, including the S&P 500 and the Dow 30 Industrials composites, having their worst-ever performance for the first two weeks of a year as compared to any prior year. Should this market volatility continue, the probability of both the share-price collapses and the filing of bankruptcy during 2016 by Conn’s and Titan Machinery will increase significantly for two reasons:

  • Institutional shareholders. The shareholder bases of Conn’s and Titan are mostly comprised of institutional and professional shareholders. Conn’s 126 institutional shareholders hold 77% of its shares. Titan Machinery has 86% of its shares held by 110 institutional investors. A heavy concentration of institutional shareholders in a declining overall stock market is very risky, especially for those companies that have deteriorating fundamentals or financial. In a declining market institutional shareholders flee to higher-quality companies and thus have no appetite to invest in companies that have deteriorating financial conditions. Additionally, an institutional investor will take advantage of an overall market decline to sell the losers in their portfolios. Since the shares of both companies hit new 5 year lows on January 15th every institutional investor who purchased the shares of either of the companies within the last 5 years has a losing position.
  • Short Sellers. Because Titan Machinery and Conn’s have business and revenue models that produce paper-only profits, both companies have a high percentage of their shares being sold short. At the end of 2015 Conn’s had 45% of its outstanding shares sold short. Titan Machinery’s percentage was 31%. The heavy concentration of short sellers for any company that has deteriorating financials poses a huge risk especially when the overall stock market is declining. In a declining overall stock market the strategy of a short seller changes. Instead of covering or buying back shares for a short-term profit, the short sellers will hold their short position to generate long-term profits. The change in the short-selling investment strategy from short-term to long-term removes potential buyers of the shares from the market. With the depletion of the short covering buyers the share prices of a heavily shorted company can more easily collapse, and this can occur very quickly


Enron was a leader of the deregulated energy and utility industries. Fortune named Enron as "America's Most Innovative Company" for six consecutive years, from 1996 to 2001. The company was able to inflate its revenue and earnings by booking sales of the energy-related derivative contracts that did not require the collection of cash when the contracts were entered into. When Enron began to run out of cash it began to quickly unravel.

AstroPower, Inc.

AstroPower was a high-flying manufacturer of solar panels that it sold to businesses and consumers. In 1999 it was named by IndustryWeek as one of its 25 most successful small manufacturers. The company’s business model and its producing of revenue and profits was dependent on it directly providing financing to its customers to purchase its products. At the point that AstroPower became unable to raise additional debt or equity capital, its business model also began to unravel.

Suprema Specialties

Suprema Specialties was a fast-growing manufacturer of specialty cheese products. In 2001 Fortune Magazine ranked it as the 23rdfastest-growing public companyin the United States.Suprema used its $250-million credit line (that it obtained from a consortium of New Jersey banks) to place its cheese products on the shelves of grocery stores throughout the Northeast. Its problem was that it never collected on the accounts receivable owed by the grocery stores. Its burgeoning accounts receivable, paper profits, and cash expenses required to maintain its operating overhead resulted in its shares being suspended for trading by NASDAQ six weeks after its underwriter, Janney Montgomery Scott, completed a $60 million secondary offering of its shares.

Titan Machinery

Titan Machinery Inc. owns and operates a network of full-service agricultural- and construction- equipment stores in the United States and Europe. The company’s consistent profit growth from 2008 to 2014 was completely dependent on it growing its customer-financing floor plan. Because Titan’s profit margins on the sales of used-equipment inventory are lower than the margins from the sales of its new-equipment inventory, it operates similarly to a highly leveraged automobile dealer. To stimulate sales, automobile dealers will run end-of-the-month ads stating that they will pay top dollar or an inflated trade-in value for a used automobile that is traded for a new car that the dealer sells at the list price. Utilizing this tactic enables automobile dealerships to inflate profits at the end of the month by utilizing used-car trade-ins to sell new cars at higher prices. The aggressive selling strategy enables the dealer to generate the profits and turnover to satisfy its floor-plan financier at the end of the month. The trade-ins on which it would be difficult to earn a profit are moved into the next month’s financials or onto the dealers’ back lots. The scheme works as long as the dealer has access to ever-higher credit lines. Most dealers (especially those that are not leveraged) normally make a greater profit on the sales of used automobiles than new ones.

Titan had been successful at playing its shell game, moving the traded-for used equipment into its inventories, only because it had been able to grow its debt and credit lines every year from 2007 when it went public through 2014. From its 2007 IPO price of $8.50 Titan’s share price hit an all-time high of $36.00 in 2012. During its FY 2015 Titan’s lenders ceased to increase the company’s credit and conversely demanded that it reduce its debts. Titan’s reduction of its total liabilities from $1.15 billion in 2014 to $973.2 million in 2015 resulted in its incurring $32 million of losses for FY 2015. Based on its most recently reported third quarter, Titan has further reduced its total liabilities and is projecting a loss for its fiscal 2016.

Titan Machinery’s Total Liabilities

For FY 2012 through FY 2016

FY Ended 1/31

Total Liabilities


$751.7 Million


$1.04 Billion


$1.15 Billion


$973.2 Million


$819.4 Million

*3rd FY quarter ended 10/31/15

Having access to an ever-increasing amount of credit was the reason Titan was able to report spectacular annualized revenue growth for every fiscal year from its IPO through its FY 2014. From 2007 Titan’s annual revenue steadily grew from $292.59 million to $2.22 billion in 2014. Since executing its plan to reduce its debts Titan’s annualized revenue and quarterly comparisons have been steadily contracting. Wall Street analysts are now estimating that Titan’s annual revenue by 2017 will have declined by almost 50% (or $1-billion) between 2014 when Titan’s annual revenue peaked.

Titan Machinery’s Actual & Estimated Revenue

For FY 2012 through FY 2017

FY Ended 1/31


% Change


$1.65 Billion



$2.19 Billion



$2.22 Billion



$1.90 Billion


2016 est.

$1.40 Billion


2017 est.

$1.29 Billion


I had originally projected that Titan would go into bankruptcy in 2015. Titan was only able to avoid bankruptcy by amending its credit agreements with its lenders. Titan also reduced its orders for new equipment, and sold the new equipment in their inventories to generate cash. The tactics that they had previously been using only delayed the inevitable. Since Titan’s portion or ratio of used equipment to new equipment has been increasing, they soon will have no choice but to begin selling the used equipment in their inventories. As soon as this happens, which will likely be in 2016, Titan’s losses will become much more pronounced. Titan has more than $300-million in used-equipment inventory. Most of its stores are in markets or communities that are highly dependent on oil. Therefore, the probability is high that Titan will lose $100-million from having to take a 33% loss on its sales of used equipment. Losses of this magnitude could trigger a bankruptcy filing sooner rather than later, inasmuch as Titan would likely be in violation of its debt covenants with Wells Fargo and other lenders.

Conn’s, Inc.

Conn’s was founded in 1890 and has approximately 80 retail stores predominantly located in Arizona, Louisiana, New Mexico, Oklahoma, and Texas. The company sells durable consumer goods including appliances, electronics, furniture and mattresses on credit. The majority of Conn’s customers requiring credit reside in the state of Texas. This customer-base either manifests low credit scores, or has no credit. For this reason, Conn’s became the direct provider of “flexible in-house credit options” to its customers thereby enabling them to purchase their products. Conn’s has no choice but to bear the risk in the event that the outstanding accounts receivable that it has with its customers cannot be collected. For the past couple of years it has reported delinquency rates of approximately 10% for the payments on its open customer receivables.

Over the last three fiscal years Conn’s has generated $423 million of cumulative negative operating cash flow that was slightly less than twice the paper profits of $214 million that it reported. To steadily grow its revenue and profits, Conn’s has had to steadily increase its total liabilities. For its third fiscal quarter ended October 2015, Conn’s reported that its total liabilities had increased to $1.45-billion, an increase of 50% compared to its FY ended January 31, 2015. More significantly, Conn’s total liabilities for its latest October 31, 2015 reporting period exceeded its Accounts Receivable for the first time in five years.

Since 2012, Conn’s ratio or its percentage of its customer-accounts receivable as compared to its revenue has risen significantly. The ratio increased from 74% of its revenue being derived from it directly providing credit to its customers in FY 2012 to 88% in FY 2015. Based on the revenue of $1.61-billion that has been estimated for its current fiscal year ending January 31, 2016, 88% of its revenue will be generated as a result of it providing credit to its customers.

Conn’s Accounts Receivable (AR), Revenue (Rev)

& Rev % changes & AR/Rev Ratios 2012 — 2016

Fiscal Year (FY) End 1/31

Accounts Receivable **


Rev % change

AR/Rev Ratio


$589.3 Million

$792.3 Billion




$752.1 Million

$865.0 Billion




$1.06 Billion

$1.19 Billion




$1.30 Billion

$1.48 Billion



2016 est.

$1.41 Billion*

$1.61 Billion



*3rd FY quarter ended 10/31/15

**Includes long-term AR

Based on my analysis of Conn’s Financial Statements and its January 7, 2016, announcement that its same store sales for the month of December 2015 had declined by 5.5% the probability is high that the revenue the company will report for its 2016 fiscal year ending January 31st will prove to be an all-time high. Conn’s total liabilities exceeding its customer accounts receivable for the first time since 2011 will make it difficult for it to increase its borrowings to enable it to provide additional credit to its verifiably credit-challenged customers who are at a much higher risk to default on payments and become “doubtful” accounts. Because at least 87% of the revenue that Conn’s has generated since 2013 was generated by providing in-house credit to customers who fall within this category (thereby enabling them to purchase Conn’s products), its growth of both revenue and paper profits are completely dependent on being able to increase its borrowings. My prediction is that Conn’s quarterly revenue comparisons will begin to decline sometime during Conn’s new fiscal year, which will begin on February 1st.

Conn’s is now precariously positioned. The company’s revenue has likely peaked and its record paper profits will soon become losses since the default rates on collections of its open accounts receivable will probably increase because the vast majority of Conn’s credit-challenged customers to whom Conn’s consistently extends credit reside in Texas, which has taken an economic hit. While Texas has diversified following the 1980s decline in oil prices, it is still heavily oil-dependent. The price of a barrel of oil falling to a 13-year low at the beginning of 2016 and below the $36 cost to extract a barrel of oil has already resulted in many oil-related job losses. These job losses will continue across many sectors. The workforces least capable of sustaining protracted downsizing are those within the secondary sector, including blue-collar workers in the oil industry and all peripheral support-sector workers employed by oilfield-services companies, thus any businesses they and their families patronize will be affected. This creates larger exposure for Conn’s and greater risk. Conn’s “house of cards” is positioned to come crashing down during 2016 because this informal sector employment is characterized by a high degree of financial insecurity and they represent Conn’s unstable customer base.

The video “Titan Machinery is a Perfect Short” which explains how negative cash flows and record earnings are the root of a perfect short is available and is recommended:

My predictions are frequently ahead of the curve. The September 2007 predictions in my column stated that share-price collapses of the five major brokers, including Lehman and Bear Stearns, were imminent. While accurate, they proved to be premature. That is the reason I advised readers to get out a second time in my January 2008 column entitled, “Brokerages and the Sub-Prime Crash”. My third and final warning to get out, and stay out, occurred in October of 2008 after Lehman had filed for bankruptcy. For my article “The Carnage for Financials Isn’t Over” I reiterated that share prices for the two remaining public companies continued to be too high. By the end of November 2008 share prices of both Goldman and Morgan Stanley had fallen by an additional 60% and 70%, respectively — new all-time lows.

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