Short Stories: Bally bleeds out

Although short selling -- the practice of selling borrowed shares with the hope of repaying the loan by buying back the shares at a lower price -- goes against the American belief that stocks always go up, I have long been fascinated with it. Short Stories discusses what works, what doesn't, and what some of the leading lights in shorting stocks think about its opportunities and threats. I describe possible short trades and I seek your comments and questions for story ideas. I don't offer any investment advice and I don't trade on any of the posts I write.

Last November, I analyzed Bally Total Fitness (NYSE: BFT) and concluded it was a good candidate for a short sale. With its announcement today that it may file for bankruptcy, that looks like a good bet. If you had shorted BFT at $2.53 on November 6th and closed your position at today's $0.67, your return would have been 278%.

Back then I was concerned that hedge fund giant Stevie Cohen, who had bought shares of the company, knew something I did not -- his fund, SAC Capital Advisors, owned 6.9% of BFT. I guess Stevie can afford to lose money on BFT which had $827 million in outstanding debt as of March 14, and said that it may need to reorganize its operations under Chapter 11 if it's unable to restructure that debt. BFT also noted that it won't be able to file its Form 10-K for the fiscal year ended December 31 by today's deadline and it sees a loss from continuing operations for 2006.

I still don't know what Cohen saw in this investment but he still owns a 32,000 square foot mansion in Greenwich, CT -- and I don't.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Bally.