Insider Buying

Loop Industries Inc short attack: What does insider transaction and short selling data tell us?

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The share price of Loop Industries Inc (LOOP:US) crashed by nearly 40% last week following the release of a report by US short seller, Hindenburg Research.

Loop Industries is a Canadian technology company that is focused on accelerating the world’s shift towards sustainable PET plastic-and-fiber and away from our dependence on fossil fuels. Hindenburg Research is a well-known US short seller founded by Nate Anderson. Recently, it launched a short report on Nikola Corp which resulted in Nikola’s stock price nearly halving and its founder, Trevor Milton, stepping down as Chairman.

Hindenburg's report on Loop, which was released on 13 October and entitled “Loop Industries: Former Employees and Plastics Experts Blow The Whistle On This “Recycled” Smoke And Mirrors Show” states that the Canadian company’s plastic recycle technology doesn’t work. It also claims that Loop’s CEO, Daniel Solomita, has encouraged scientists to lie about the results of the company’s internal process. Hindenburg believes that Loop will “never generate any meaningful revenue” and that the stock has “100% downside.”

In these kinds of situations, insider activity and short selling data can be very useful. Clearly, Hindenburg is bearish on Loop Industries. It believes Loop “is smoke and mirrors with no viable technology”. We need a more complete view of what’s going on, however. So, let’s take a look at what the insider transaction and short selling data tells us about Loop Industries right now.

LOOP-uS (price)   Source: 2iQ Research

Hindenburg’s Loop Report

Before we analyse the insider activity and short selling data, let’s review the accusations made by Hindenburg. In its report, the short seller claims that:
  • “The company claims to have discovered how to turn worthless trash into pure gold, a feat that multi-billion chemical companies such as DuPont, Dow Chemical, and 3M have been unable to achieve on a large scale despite years of efforts.”
  • “Loop’s CEO, who has no specific educational background in chemistry, sought out the help of several convicts to put together Loop’s startup capital, according to litigation records.”
  • “Loop’s management has a track record of taking investors on a ride with sweet sounding public company stories that have ended in catastrophic losses.”
  • “Loop’s partnerships have gone almost nowhere. The company announced a key joint venture in 2018 to build a facility with well-respected PET and chemical company Indorama, but two years later the terms of the deal have yet to even be finalized. Other major consumer plastic brands were unable to confirm to us that their partnerships with Loop had progressed.”
  • “It has a history of widening net losses that leave us little faith that the company will ever generate income on its bottom line (or produce meaningful top line revenue, for that matter)”. 

Hindenburg summarizes its research by stating that with a market cap of ~$331.16 million, it sees 100% downside to Loop once it burns through its ~$48 million in balance sheet cash.

LOOP-US(factset)
                  Source: Factset

Response from Loop Industries

Loop Industries has been quick to respond to Hinderburg’s report. On 14 October, it replied to the allegations in a news release. It said that:

  • “Hindenburg Research has not engaged with Loop directly nor does Loop Industries believe Hindenburg Research has done the required due diligence for this report. The claims it makes are either unfounded, incorrect, or based on the first iteration of Loop's technology, known as Gen 1, which was in use between 2014 and 2017. In 2017, Loop reinvented its process and developed its Gen 2 technology, which is at the core of Loop's commercialization projects.”
  • “Loop's focus remains on commercializing its technology to meet growing global demand for infinitely recyclable PET plastic and polyester fiber made from 100% recycled content.”

This press release suggests that Loop believes that Hindenburg’s claims are not accurate.

SEC subpoena

On 16 October, Loop Industries announced after the closing bell that it had received a subpoena from the US Securities and Exchange Commission (SEC). The SEC has requested information from the company in relation to its Gen I and Gen II technologies and certain partnerships and agreements.

 

The SEC informed LOOP that its investigation does not mean that the company has violated the law or that the SEC has a negative opinion of the company, however, the news sent the share price down sharply in after-hours trading.

Class action complaint

Also on 16 October, shareholder rights law firm Robbins LLP announced that a purchaser of Loop Industries had filed a class action complaint against the company's officers for alleged violations of the Securities Exchange Act. According to the complaint, between 24 September 24 2018 and 12 October 2020, the company falsely touted the strength of Loop's technological and operational profile.

Insider transaction data

Analyzing the insider transaction data, it’s very interesting to see that, since Hindenburg’s report was published, a number of insiders have purchased Loop Industries stock.

Soon after the share price fell, independent directors Laurence Sellyn and Jay Stubina increased their shareholdings by purchasing 10,000 shares each. Our records show that these were the first purchases by the two non-executives since they were appointed to the board. They were also the first insiders to purchase shares at Loop Industries since Q4 2016.

These insider purchases were soon followed by purchases from key executives – President and CEO Daniel Solomita and CFO Nelson Gentiletti. Solomita purchased 10,000 LOOP shares on 14 October, spending nearly $75,000 on stock, while Gentiletti bought 5,000 shares on the same day, spending approximately $37,000 on stock. It’s worth pointing out that the purchase from Gentiletti increased the size of his shareholding by a large 71%. However, Solomita’s purchase only increased the size of his holding by 5%.

LOOP-US(chart)     Source: 2iQ Research

Combined, these four insiders spent approximately $275,000 on Loop Industries stock between 13 October and 14 October. These purchases suggest that insiders see the share price fall as a hiccup and that the stock will recover soon.

We will point out that no buyback activity has been spotted at Loop industries since the short report was published.

Short selling data

The latest short selling data shows that, currently, 3.3 million Loop shares are on loan. In total, Loop has 42.2 million shares in issue. That means short interest is 7.8% at present, which is relatively high. Utilization – which is defined as loaned shares divided by available shares in the securities lending market, expressed as a percentage – is 96.56%.

    Source: 2iQ Research, Astec Analytics

Looking at historical data, on 30 September 2020, only 1.7 million shares were being shorted. This means that short interest has risen sharply this month. NASDAQ’s bi-monthly short interest data shows that prior to this month, short interest remained at more or less the same level during the year.

    Source: NASDAQ

Recent developments, including the Hindenburg short report, the SEC subpoena, the class action complaint, and a below-expectations earnings report could potentially attract further short sellers leading to further share price downside.

image (7)            Source: 2iQ Research

Analyst recommendations

Finally, it’s worth looking at analysts’ recommendations. From Bloomberg, we can see that of the two analysts covering Loop, both rate the stock as a ‘buy.’ Neither analyst has changed their view of the stock since Hindenburg’s short report was published.

LOOP-US (ANR)     Source: Bloomberg

Bulls versus bears

In summary, the data provides some interesting insights on Loop Industries. From the insider transaction data, we can see that multiple insiders have added to their positions since Hindenburg's report was published. This is an encouraging development as it suggests that these insiders are confident in the company’s technology and that they believe the share price will rebound.

However, from the short selling data, we can see that short interest has spiked recently. At 7.8%, short interest is relatively high currently. This tells us that plenty of sophisticated investors see share price downside here.

Overall, we appear to have a battle between the bulls and the bears.