Tuesday, September 23, 2008

You Can't Bet Against Express Scripts

Strange times lead to unusual circumstances. Here’s an odd example from the Drug Channels universe.

As of yesterday, you are temporarily banned from profiting if the stock of Express Scripts (ESRX) goes down, but are free to profit from a decline in the stock price of Medco Health Solutions (MHS).

Confused? Never fear. Here’s a quick primer on what I think is happening.

In case you haven’t been paying attention, the SEC halted short selling in the stocks of 799 financial institutions last Friday. (See SEC press release 2008-211.)

Yesterday, the SEC asked stock market exchanges to add companies to this initial list (per press release 2008-218), stating: “The Commission expects these lists to cover banks, savings associations, broker-dealers, investment advisers, and insurance companies, whether domestic or foreign, and the owners of any of these entities.”

In response, the New York Stock Exchange (NYSE) and NASDAQ added more than 130 stocks to the temporary ban on short-selling. (See SEC short ban list now covers more than 900 firms.)

Here’s the funky part. Express Scripts (ESRX) is on the expanded list, but Medco Health Solutions (MHS) is not.

As far as I can tell, this happened because the stocks are traded on different exchanges. Express Scripts is traded on the NASDAQ, while Medco trades on the NYSE. According to this MarketWatch story, the NYSE apparently asked its member companies to “self-certify” in order to be added to the list. I’m not sure how NASDAQ generated their list, but they (vaguely) describe their criteria here.

I’ll leave it to the Wall Street boffins to figure out what this asymmetric ban means, but I do note the divergent change in stock prices during yesterday’s down stock market. MHS was down -2.32%, while ESRX was down only -0.23%. Meanwhile, the SEC is already revising the rules, so the situation could change.

P.S. Yesterday’s Wall Street Journal has the contrarian POV that Short Sellers Keep the Market Honest.


  1. ESRX's largest shareholder is New York Life Insurance Company. I believe this is a more likely explanation of why ESRX was added to the short list and MHS was not. This was confirmed with NASDAQ officials yesterday.

    On a sidenote, thanks for continuing to write insightful articles. Always love reading them.

  2. Thanks for the info, although I'm still confused.

    According to Yahoo Finance, New York Life Insurance owns 917K shares, which is a very small stake.

    Fidelity Management & Research is the largest shareholder of both MHS (37.3 million shares; 7.4%) and ESRX (12.5 million shares; 5.0%). Of course, these data many not be the most current info.

    ESRX ownership
    MHS ownership

    Appreciate clarification from any other readers.


  3. Great article, Adam. I have not seen this info anywhere else. That's why I'm one of your big fans, too.

  4. Yahoo finance is not correct this time. According to last reporting date (6-30-08) New York Life owns ~7-8% of ESRX's oustanding shares.

  5. Thanks for the clarification.

    Nonetheless, I'm still puzzled why a 7-8% ownership stake puts ESRX on the list.

    Apparently, Express Scripts is also not sure how it ended up on the list. See Not All Cos Guarded By Short-Sales Rule Strictly Financial, which says:

    "If you're wondering why drug-plan administrator Express Scripts Inc. (ESRX) was added to the (do not) short list of financial stocks, so is Express Scripts.

    Asked whether the company will become the third to exercise an option to be removed from the list, a spokesman for Express Scripts said: "at this point, we have not opted out on the list."

    "We have no financial services business. The list came out, and our name was on the list," he said.