Short-Selling Stocks with Aggressive Bill-and-Hold Accounting

The Art of the Short

Short-selling can be a risky but potentially profitable trading strategy. By identifying companies that are using aggressive bill-and-hold accounting practices, traders can increase their chances of success.

Identifying the Targets

The first step in short-selling a stock with aggressive bill-and-hold accounting is to identify the right target. This involves looking for companies that exhibit the classic red flags of a bill-and-hold scheme, such as:

• A history of accounting irregularities: Companies that have a history of accounting problems are more likely to engage in bill-and-hold schemes.
• A complex business model: Companies with complex business models can be more difficult to analyze, making it easier for them to hide accounting fraud.
• A high-pressure sales culture: Companies that place a great deal of pressure on their sales staff to meet aggressive targets are more likely to resort to bill-and-hold schemes.

Timing the Trade

Once a target has been identified, the next step is to time the trade. This involves waiting for a catalyst that is likely to expose the bill-and-hold scheme and send the stock price lower. This could be anything from an analyst downgrade to a government investigation.

Managing the Risk

Short-selling is an inherently risky strategy, so it's important to have a solid risk management plan in place. This includes setting a stop-loss order to limit your potential losses and taking profits when the stock reaches your target price.

Case Study: Lernout & Hauspie

Lernout & Hauspie was a Belgian speech-recognition company that was involved in a massive accounting scandal in the late 1990s. The company was found to have used a variety of accounting tricks, including bill-and-hold schemes, to inflate its sales and earnings. The scandal eventually led to the company's bankruptcy and the conviction of several of its top executives. This case serves as a cautionary tale for traders and highlights the importance of conducting thorough due diligence before investing in any company.