- This week we have registered one new major short call.
- We saw only Spure Point releasing a new report on Perion Network (PERI) due to allegations of dubious accounting and business model. Most importantly, the report believes the company's accounting might be unreliable and raise questions about the performance of the business.
- Lastly, we are tracking the most recent stock price gyrations at several previous targets. We focus on a dubious holding company, a rebounding Indian conglomerate and a Japanese-listed solar company.
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Bits and Pieces
- A beginner’s guide to getting away with accounting fraud, part two (via FT)
- NINGI's short against Arbor Realty Trust (ABR) is not moving yet. The stock is down just 5% since the initial report two months ago alleged dubious corporate governance and potential for a $500m toxic mobile home portfolio issue.
$ABR's Ivan Kaufman said: "...one of the most successfully restructured transaction our history that was highly lucrative our shareholders..." Props to the spin doctor on the earnings call. We wonder how many loans were made to similiar folks... https://t.co/Pz1tOKeCVm— NINGI RESEARCH (@NingiResearch) May 23, 2023
- IEP thesis bringing attention to other stocks targeted by activists. Hannon (HASI) is down over 30% since Muddy and Jehoshaphat targeted the REIT due to complex accounting.
This looks a lot like $HASI, which did a stock offering today despite its stock being down 30-40% since we and @muddywatersre wrote our separate theses on it last summer (and down much more over the past two years).$HASI has no choice but to issue stock repeatedly, regardless… https://t.co/wUSMOj3tjs— Jehoshaphat Research (@JehoshaphatRsch) May 24, 2023
This week we have seen several stocks move in the right direction for the short-sellers. One of the biggest movers was Icahn Enterprises (IEP) which went down over 35% in the past five days. It was Hindenburg just at the start of the month who targeted this investment vehicle of the famous activist investor due to allegations of overvaluation, unsustainable business model and dubious corporate governance.
Most importantly, the report believed the company is trading way above NAV (in fact, at the highest valuation of all closed-end funds) due to its unsustainable dividend, which is likely to be eventually cut. The only reason why the business managed to continue to pay out the high dividend was that Icahn takes the dividend in units, not in cash and because IEP managed to raise over $1.7bn from the public markets since 2019. However, this is unlikely to continue, given the performance of IEP's portfolio.
The report has since demolished the share price, which is now down about 60%, nearing the 75% downside estimate by Hindenburg. However, we will see how the situation will play out from here as the two camps are getting increasingly hostile. The traders are therefore pointing out the low float, stock buyback and high short interest, which could create pressure on the share price.
What's so interesting about $IEP is that Ichan owns 300m shares, leaving only about 69m out there for public ownership.— Steve (@StevenShadduck) May 23, 2023
The $500m authorized buyback can buy around 18m shares as current price.
Float is even lower at 57m shares. I would be very afraid to be short this right now
Meanwhile, CEO of Pershing Square is tweeting about how IEP is bound to have further issues due to the whole business model of getting margin loans based on supposedly overvalued IEP shares.
I have been fascinated by the @HindenburgRes$IEP situation, and there are some interesting learnings here. For example, one learns from $IEP that a controlling shareholder of a company with a small float that pays a large dividend can cause his company to trade at a large…— Bill Ackman (@BillAckman) May 24, 2023
Another stock that went in the right direction was Abalance (3856.JP), which is down 12% in the past five days. It was Viceory just last week who targeted this solar business due to allegations of regulatory issues.
Most importantly, the report believes the company is avoiding US anti-dump duties as they are sourcing almost all of the parts from China, but assembling them in Vietnam, which allegedly goes against the regulation. This structure is likely to face severe issues as the US government is implementing new rules in 2024, which are aimed to shutdown operations such as Abalance.
Since then, the allegations have expanded to various other aspects, and it seems the company is struggling to contain the whole campaign. This is likely causing the market to sell the shares further as Viceroy is coming up with updates every few days. For example, the activist released a guide on how to find the evidence they used to write the report since many of the investors called the evidence fake.
Abalance - A guide to download corporate filings is now live on our website.https://t.co/9YYn2vDpDL— Viceroy (@viceroyresearch) May 22, 2023
Management & shareholders have accused our filings & findings of being "fake". A guide to do them youselves is now on our website #abalance
This is unlikely to inspire much confidence in the management of the company.
On the other side of the tracks, we saw only a handful of stocks going against short-sellers in a major way. One of the biggest movers was Adani Enterprise (ADANI). This Indian-based conglomerate spanning various industries, moved up over 30%. Initially, it was Hindenburg who wrote about the business due to allegations of fraud and stock manipulation.
Most importantly, the report believed the company and its insiders have conspired to create shell companies which allowed the Adani family and the Adani group to receive a significant amount of cash while maintaining the seemingly healthy financials of the listed companies. This helped to fuel the stock price, which was then used by the insiders to pledge their shares and raise debt.
The thesis has basically played out as the company was scrambling to find an adequate response in the face of the allegations and decreasing share price. Now, it seems the stock has been supported by news coming out of India about the ongoing investigation. A panel of experts released news that they did not find any specific issues with foreign investment into Adani. Traders bid up the shares in the hopes that the investigation is unlikely to yield anything material.
However, this is just the beginning of the process. As per a Reuters article, the Indian regulator is still carrying out an investigation and will need more time to finalize various different aspects such as related-party transactions and others. More news is expected to come out close to August of this year.
Adani Enterprises was down as much as 64% since the initial report but has since rebounded and is now down only 25%. The activist talked about shorting Adani's bonds instead of the shares. Hindenburg did not comment on the latest developments.
Spruce talking about dubious adtech
This week we also saw Spruce release a new report targeting Perion Networks (PERI). The activist wrote about this $1.4bn tech company due to allegations of dubious accounting and business model.
Most importantly, the report believes the company's accounting might be unreliable and raise questions about the performance of the business. Spruce can't understand how PERI is able to crush the competition without spending much money on R&D (for example, PERI generates almost four times the EBITDA per employee than the competition) and why they need to raise cash when the company can produce millions in free cash flow.
Non-sensical capital usage should be a MAJOR red flag when evaluating $PERI. Despite its depiction of strong cash flow, they took $ from investors + haven't used it. Now, they want to increase share authorization by 20m. Why? Citing a reason 'to preserve and increase market… pic.twitter.com/5NHemskfhx— Spruce Point Capital (@sprucepointcap) May 23, 2023
Moreover, the company's CEO has ties to an entity charged with inflating revenue, their acquisitions raise red flags when Spruce looked at their inner workings, and PERI's revenue recognition policy is becoming opaque while its auditor raised it as a critical matter.
We believe $PERI engages in extreme obfuscation, especially in ad search revenue reporting w/ $MSFT. Every quarter they spin something different and don't give consistent disclosure of revenue drivers. Be careful with their avg daily search term. They used to call it… pic.twitter.com/nolOQsm11E— Spruce Point Capital (@sprucepointcap) May 23, 2023
Due to all this, the short-seller sees a significant downside of up to 40%. The market is likely to eventually sell shares as the company might have a hard time maintaining picture-perfect finances and growth opportunities.
The stock quickly reacted and dropped sharply by about 5% but then started to rebound and is now slightly higher than before the report. The activist called out the company for not responding to the allegations.
$PERI mgmt has had a day to say something, anything in response to our documented concerns, but dead silence instead. And with the stock down, and all that cash, instead of buying, they want to authorize more stock issuance. What are we missing here? #bearish#skeptic— Spruce Point Capital (@sprucepointcap) May 24, 2023
The public reaction to the report was muted as Twitter traders did not talk much about the stock or the report. The sell-side just reiterated their target, which is not unusual.
Last but not least, we would like to mention that activist is among the most proflic ones in the public scene. The PERI report was Spruce's 98th public report in our database. Thus, the activist is nearing the 100th mark.
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* Note: Presented data and analytics is as of available on 2023-05-26 UTC 12:00.
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