Equity hedge fund Argonaut Capital sees “treasure trove” of shorting opportunities

Treasure trove

Long-short equity hedge fund Argonaut Capital is eyeing a potential “treasure trove” of short opportunities in previously well-regarded stocks, as the changing inflationary environment and opening up of economies impacts markets.

The London-based equities-focused firm’s core strategy, which is built around Argonaut founder, CEO and CIO Barry Norris’s ‘earnings surprise’ investment process, has gained 4.1 per cent so far in May, having rebounded from an April loss of 0.34 per cent.

The Argonaut Absolute Return hedge fund made gains from successful long bets in US housebuilder Hovnanian and building materials name Louisiana-Pacific, along with Wells Fargo, during April. In a strategy update, Norris said the market is potentially underestimating the duration of the current “incredible demand” in housing.

However, short positions in US biotech stocks Vaxart and Inovio Pharmaceuticals last month went awry.

Norris said April’s market moves chimed with Federal Reserve chairman Jerome Powell’s view of inflationary pressures as “transitory”, as investors looked to rotate out of value stocks and commodities and back towards growth stocks and bonds.

He pointed to a series of key differences in the coming cycle, with fiscal austerity set to make way for “persistent” double-digit fiscal deficits, and the forthcoming fiscal stimulus likely to be immediately spent in contrast with monetary stimulus benefitting those already with capital.

As a result, “a deflationary investment boom is being replaced by an inflationary consumption boom,” he added.

The fund, which takes a fundamental, bottom-up approach to stock selection, has strengthened its perspective on certain sectors post-pandemic, and is bearish on what it sees as overvalued “disruptive” names.

“We expect multi-year booms in homebuilding, mining, steel, agriculture, transportation, and semi-conductors,” he observed, adding the “surprise” now hinges on how long the supply side takes to increase production to meet incremental demand.

He continued: “The current capital cycle is now long in the tooth. There has been too much capital raised by ‘disruptive business models’ chasing the same profitless sales.”

The new evolving macro inflationary regime would likely squeeze such business models, he predicted, with investors avoiding paying the same “nosebleed” valuations.

“This bubble is bursting in the absence of a Fed hike because inflationary expectations are being allowed to build,” he added.

“If we are correct then previously high-flying stocks should offer a treasure trove of short opportunities and we should start to generate positive returns once again from our short as well as long books.”