Short seller attacks happen regularly. The attacker – often an analyst firm, research house, or other investigatory organization – identifies a company that it believes is overvalued and issues a report detailing the reasons why it believes the stock price will fall.
These short seller attacks can be scathing and aggressive. Others focus on extensive investigations, analysis, and detective work.
Short seller attackers normally have two objectives.
- To improve company governance and indirectly protect other investors
- To profit from their investigation by driving down a company’s share price
The mechanism for short seller attacks ranges from statements on message boards, social media or blogs, formal press releases sent to the media, or reports claiming that the company and its stock is in financial trouble. Some attackers go further and accuse senior management of fraud and claim the equity has no value at all.
The format of short seller attacks typically follows a similar pattern each time.
- Attacker investigates
- Attacker issues a public report
- Defending company counters claims or stays silent
- Attacker elaborates further
- Defender responds
How Investors Should Approach Short Attacks
Investors often react to this chain of events by selling stock while some choose to keep faith in their investment.
Many choose to combine insider transaction data and short selling data to provide a more complete view of the situation and to gain crucial insights. Tracking how insiders react to short attacks can help justify an attack’s substance.
In recent months, we have observed multiple short seller attacks covering a variety of scenarios as these examples demonstrate.
Shares in mobile gaming operator Skillz fell after prominent short-seller Wolfpack Research published a critical report citing ‘farcical’ revenue projections, claiming the company’s top three games had plateaued in sales in Q3 2020 and that there was no evidence that a lucrative business deal had ever taken place.
With no response from Skillz at the time, we analyzed the insider transaction data.
Five senior insiders had recently offloaded large amounts of company stock, and our securities lending data showed that short interest was 14.3%. There was a strong demand to short the company’s stock relative to the number of available shares plus the share price had risen by 360% in just a few months, followed by a fall, but the stock remained expensive.
Our assessment based on the data was that caution was warranted towards Skillz stock.
In another instance, the same company, Wolfpack Research, issued a scathing report on Chinese drone manufacturer Ehang Holdings, claiming an “elaborate stock promotion built on largely fabricated revenues based on sham sales contracts”.
The attacker questioned Ehang’s relationship with its primary customer, both company’s financials, and took aim at Ehang’s flight certifications.
Ehang responded by saying the Wolfpack report had numerous errors, unsubstantiated statements, and misinterpretation of information.
Looking at the insider transaction data, it was clear that there had been no insider buying since the company came to the market in December 2019, indicating no confidence in the company’s future amongst insiders.
There were also poor reviews on Glassdoor, particularly in relation to the CEO, and a lot of short selling activity in sharp spikes. Ehang’s stock, however, had an incredible run, gaining approximately 520% in just six weeks.
We surmised that it was too early to say if Wolfpack’s claims were correct.
In October 2020, the share price of Loop Industries crashed by nearly 40% following the release of a report by US short seller, Hindenburg Research, claiming that its plastic recycling technology didn’t work. It said that the CEO had encouraged scientists to lie about the results of Loop’s internal process.
Loop said that Hindenburg had not done its due diligence on the report.
The insider transaction data showed multiple insiders had added to their positions since Hindenburg's report was published, which was encouraging, suggesting they were confident in the company’s technology and that they believe the share price will rebound.
However short interest spiked recently, indicating that plenty of sophisticated investors see share price downside here.
Shares in Australian online employment firm Seek fell heavily after Texas-based short seller Blue Orca Capital published a scathing report claiming it was carrying toxic levels of debt and it was grossly mispriced. Seek said it was in compliance with its continuous disclosure obligations and remained confident of its long-term outlook, and that the report was littered with inaccuracies.
We found it interesting that no insiders had bought Seek shares since Blue Orca’s report was published. Despite Seek’s share price falling, no insiders had gone long, suggesting that either they were not confident about the future, or they didn’t see value in the stock.
Insider sentiment was quite negative. Major shareholders had been offloading stock in recent months and short interest increased over the previous few days. Overall, it was still too early to know if Seek was in the clear, but the data suggested that Blue Orca’s claims could have substance.
Top Glove Corporation
In 2020, shares in Malaysian medical glove manufacturer Top Glove Corporation performed well thanks to high demand for medical gloves due to the pandemic. But in January 2021 following several major institutions turning negative on Top Glove, short sellers targeted the stock heavily.
This could have been due to a decline in demand for medical gloves, or because of concerns over the company’s handling of the coronavirus and working conditions at its factories, leading to infections.
We noticed that Top Glove’s Founder and Chairman had spent a significant amount of money on stock. Normally, this would be interpreted as a bullish signal. However, given the insider’s net worth, and the size of his holding in Top Glove, this buying activity had less significance.
Meanwhile, short sellers had ramped up their short positions. We thought it was worth monitoring this situation. If Top Glove executives and directors were confident about the company’s prospects, more insider buying would happen in the near future.
Grenke AG is the final example. Shares in the German leasing company fell heavily following a report by US short seller Viceroy Research. This accused Grenke of engaging in fraudulent accounting techniques, swindling small businesses, and laundering money for criminals. Grenke responded with strenuous denials.
At the time, we saw that at least one insider was confident that Grenke stock would bounce back, but we felt that it would be good to see some more insiders buying the stock at a share price well below the level that insiders were buying at a few months previously.
On the short side, there were three funds currently short. However, the overall level of short interest was not particularly high, and no institutions had taken short positions since Viceroy’s report was published.
Our conclusion was to monitor the insider transaction data closely. If Grenke insiders were truly confident that the company was in the clear, more buying activity would happen in the near future.
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