Entrepeneur Steve Hudson, chief executive officer of Element Financial Corp. The corporation just launched a massive equity offering.J.P. MOCZULSKI/The Globe and Mail
Element Financial Corp. has appeared on the Toronto Stock Exchange's Top 20 Largest Short Positions tables for several months. In the report for Aug 15, short interest stood at 22.6 million, nearly 9 per cent of shares outstanding. Three months ago, on May 15, short interest was just 13.3-million shares.
Run by Steve Hudson, a former head of the Hair Club for Men, Element Financial began trading on the TSX in December of 2011. The listing was obtained through a reverse takeover of a shell company.
The company mainly supplies "asset-based financing" to companies that want to lease vehicle fleets and other equipment. For example, the Tim Horton's trucks we see on the road are not owned by Timmies but leased from Element Finance.
An acquisition spree, financed with several issues of common stock, preferred shares and debentures, has fuelled rapid growth and generated share appreciation of nearly 300 per cent over the past three-and-a-half years. The most recent acquisition was GE Capital Corp.'s U.S. vehicle-fleet financing business.
It could be that the short position reflects a negative view on the sustainability of the rapid growth model and outsized advance in share prices. Nonetheless, it would be a mistake to attribute too much bearish sentiment to the current short position.
That's because Element Financial has issued convertible debentures and some buyers of these securities have shorted the common stock as part of a convertible arbitrage. These investors aren't bearish on the stock so much as seeking to capitalize on the mispricing of securities within the company's capital structure. So say equity analysts such as Stephen Boland of GMP Securities L.P.
As noted, Steve Hudson previously ran the Hair Club for Men. Before that, he ran Newcourt Credit Group, a provider of asset-backed financing. Thanks in large part to a growth-by-acquisitions strategy, its stock soared 1,000 per cent at one point in the 1990s. The company was acquired by another firm.
Bay Street and institutional investors see Element Financial as a reincarnation of Newcourt. Sentiment is bullish and sources of financing are deep. More acquisitions are planned, as is a dividend. Element Financial could be the freight train that keeps on barreling down the tracks for a while longer.