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Why This Bear Is Dancing


You think the bear market is bad now? It's going to get worse, says Dallas money manager David Tice. A lot worse. Tice thinks the Dow Jones industrial average will careen below 3,000 over the next few years. "Because of excesses and imbalances doled out throughout the 1990s, we had a party that wouldn't stop that essentially [was the equivalent of being] on cocaine and tequila," says Tice. "Now we have a big hangover, and we're paying the price for it."

Well, not everyone. For perennial stock market bear Tice, the party may just be getting started. Just look at his Prudent Bear (BEARX) mutual fund. Unlike most fund managers who buy shares of stocks hoping to profit when their prices rise, his $347 million short fund borrows shares, sells them at a high price, and then buys them back cheap after the prices plummet. So far this year, Prudent Bear has racked up a return of 65.9%, while the Standard & Poor's 500-stock index has plunged 25.6% (chart). In fact, Prudent Bear has had a good run for the past 2 1/2 years, up 107%, vs. a 30% drop in the S&P.

Prudent Bear is one of only a handful of actively managed short funds--that is, Tice mainly picks individual stocks rather than shorting a market index. Tice has made big gains by betting against such onetime Wall Street favorites as Sunbeam, Enron (ENRNQ), Tyco (TYC), and Amazon.com (AMZN). "Tice and his associates do their homework," says Alan Papier, a fund analyst at Morningstar. "He's making his shareholders a lot of money in an environment that's really bad for most investors."

Tice insists he doesn't take pleasure in the stock market's misery or in seeing the economy tank. "I'm sincerely saddened by what I see as the prospects ahead," he says. "We are making good money, but we are not cheering for any of this. We'd rather make money with everybody in prosperity." Tice says when the market is good, he adds more long positions. Currently, Prudent Bear is 65% short, 20% long, and 15% in cash.

Tice, 47, has been sounding alarms for more than a decade. After earning an MBA from Texas Christian University in 1977 and doing stints as an internal auditor for an oil company and an analyst for a small investment advisory firm, Tice struck out on his own in Dallas in 1988. His idea was to do research that most on Wall Street didn't do: highlight the potential pitfalls, such as aggressive accounting, of darling stocks. Tice began publishing a scathing twice monthly research report called Behind the Numbers, which he sells to institutional investors for $15,000 a year. The report features stocks of companies unlikely to fulfill Wall Street's still lofty expectations and that appear headed for a fall.

To identify those stocks, Tice and his staff of 15 analysts, five of whom are also accountants, scour a firm's financial reports for earnings quality. This process includes analyzing footnotes, operating earnings momentum, and balance-sheet ratios. In addition, the firm conducts a "grassroots" analysis, which might include discussions with customers, suppliers, competitors, and governmental agencies. The objective is to understand if investors' hopes are justified. He thinks about 15 is a reasonable price-earnings ratio for the market.

Tice, whose cluttered desk is surrounded by three desktop computers, one laptop, and a TV tuned to CNBC to keep him abreast of market happenings, attributes his skeptical nature to his accounting background and his upbringing in Independence, Mo., Harry Truman's hometown. "Missouri is the show-me state, which helps make me somewhat more of a skeptic," he says.

Over the years, several stocks have suffered the consequences of Tice's dogged scrutiny. They include Warnaco Group, which went bankrupt in June, 2001, seven years after Tice warned of its rising inventories and debt, and Sunbeam Products, which he said in 1996 was taking special charges that concealed underlying problems. In 1998, Sunbeam restated its financial results, and CEO Albert Dunlap resigned.

Tice's most high-profile target was Tyco International. In 1999, his report accused the company of using "accounting intrigue" to bolster its earnings, well before the facts about Tyco became known. Shortly after, Tyco's stock sank 40%, and the Securities & Exchange Commission launched a probe but never took action. These days, given Tyco's rapid fall from grace, Tice could be forgiven for gloating, but he's not yet ready to declare victory. "The other shoe hasn't really dropped from the accounting perspective yet," he says. "The stock has had two legs down due to their debt problems and to [CEO Dennis] Kozlowski's personal stuff." That's why Tice is still shorting Tyco in the Prudent Bear fund.

Tice started Prudent Bear in December, 1995, to give investors a place to make money in a down market. His timing was lousy. In each of the fund's first four years, the market posted big gains, and he racked up losses. "We went through some tough times in the early days," says Patrick Ohnmeis, a retired American Airlines pilot who has been a Prudent Bear investor since 1997. "But I stuck by him because I believed, like he did, that the market was an overvalued bubble. Now, we're making lots and lots of money."

While those years were painful, Tice says he never considered throwing in the towel because his bear case was based on solid analytical research of individual companies, the stock market, and economic history. "We knew we were going to be right, it was just a matter of when," he says. "A lot of bears, because they didn't possess the conviction, because they didn't have the analytical support for their argument, thought: `What's going on? We must be wrong.' Well, I'm an independent thinker...and the three legs of our stool gave me the confidence we were right."

These days, Tice is betting he's right about the 150 stocks, including General Electric (GE) and Dynegy (DYN), that he admits to shorting in the Prudent Bear fund. Tice is also betting against stocks in telecom, semiconductors, and financial services, particularly subprime and credit-card lenders. He declines to be more specific. Among the largest short positions mentioned in the most recent shareholder report, dated Mar. 31, are U.S. Cellular (USM) ; Electronic Arts (ERTS), the video-game software company; and Pixelworks (PXLW), which makes graphics chips and software.

So, what does Tice like? Gold stocks, in which he has long positions, and two-year Treasury bonds. Beyond that, his advice for investors? "They should be like a squirrel in terms of storing their nuts and take care of their finances," he says. "They ought to think about selling their stock." Or consider short selling--either themselves or with a manager like David Tice. By Stephanie Anderson Forest


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