- This week, we have registered one new major short calls.
- Bleecker Street Research targeted this USD 0.7 billion company, PureCycle Technologies (PCT), due to allegations of failure to launch its commercial operations and issues with its recycling process. The market disregarded the report as shares closed 15% higher.
- We also discuss a couple of updates by activists. We talk about developments in Sprout Social (SPT), which is down 26% since Akram's Razor targeted it. The activist released an update and reaffirmed their bearish view due to poor earnings quality, which supported the original arguments.
- We also look at Fuzzy Panda's campaign against Xponential Fitness (XPOF). The stock had a volatile ride around the earnings but managed to rebound. The stock is down 42%, but Fuzzy raised further red flags and remains short.
- Lastly, we are tracking the most recent stock price gyrations at several previous targets. We focus on two struggling SaaS business and a construction company defying accounting allegations.
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Bits and Pieces
- Bleecker still sees the same problems with CACC. The stock has been a challenge to many short-sellers who used to believe the business model should crumble eventually. CACC is up 4% since Bleecker's short.
We think CACC has again under-reserved on new loans.— Bleecker Street Research (@Bleecker__St) October 30, 2023
Credit loss provisions as a percentage of new loans were only 7.7% vs 9.5% and 11.5% in 2022 and 2021, respectively.
Loans from its 2021 and 2022 vintages were under-reserved so why are provisions dropping on new loans?
- Friendly Bear continues to monitor RILY's developments and continues to raise corporate governance red flags. The stock is down 29% since the initial report.
$RILY just acquired Brian Kahn's FRG. Bloomberg identifies Brian Kahn as a co-conspirator in a massive investment fraud that just saw a guilty plea today.— The Friendly Bear (@FriendlyBearSA) November 2, 2023
Only the best people work with B. Riley. pic.twitter.com/bSkVynKi9B
- NINGI believes the downside opportunity is now starting at RWAY, as investors might start selling. The stock is flat since the initial report.
Now filed, $RWAY's N-2, hence the secondary, was declared effective yesterday. Oaktree will sell its $250m stake in RWAY, dumping more than 21 million shares without ample liquidity...— NINGI RESEARCH (@NingiResearch) November 1, 2023
- Jehoshaphat sees further red flags over at RCM. The stock is already down 17% since the initial report released in mid-October.
$RCM— Jehoshaphat Research (@JehoshaphatRsch) November 2, 2023
Pediatrix announced this morning that it's ditching $RCM as its vendor. Could this explain why $RCM has had so much bad debt expense lately?
Someone should ask on the $RCM earnings call today whether recent bad debt expense is or has been tied to payment disputes from… pic.twitter.com/Y9UcF9bsuT
This week, we have seen several stocks move in the right direction for the short-sellers. One of the biggest movers in the right direction was a new campaign targeting Paycom Soft (PAYC), which plunged 34% in the past five days. Initially, it was Kerrisdale Capital who targeted this SaaS company due to allegations of overvaluation.
Most importantly, the report believed the company is facing significant headwinds which do not justify 70x FCF valuation. PAYC is allegedly facing slower employment growth, meaningful TAM saturation and increased competitive pressure. The company is apparently no longer a start-up that can claim a small market share and promise further scalability. Kerrisdale believes PAYC is a scaled business and, along with other competitors, owns about 40% of the market share, making it harder to grow further, especially when new competition is trying to fight for its share.
The thesis has now played out. The reason for the sharp blow was a cut in the guidance, which highlighted challenges Kerrisdale warned about.
$PAYC -25% AH as it cuts revenue and EBITDA forecasts. Now down -45% since our report. Competition, saturated TAM, macro driving deteriorating numbers, which means it's time for its formerly absurd valuation to deflate https://t.co/cjQYgl0lS5— Kerrisdale Capital (@KerrisdaleCap) October 31, 2023
The stock is now down over 52% and hit the upper downside target.
Another stock that went in the right direction for short-sellers was Zoominfo (ZI), which is down more than 11% in the past five days. Initially, it was Wolfpack Research who targeted this SaaS company due to allegations of bad corporate governance.
Most importantly, the report believed the company relies on purchasing data from a dubious entity which might have stolen the information. ZI is then passing the data through an entity which acts as a front for the dubious entity. This apparently puts into question how clean and legal data ZI's customers are using.
It seems the thesis is largely playing out, but perhaps the market might be pushing ZI down due to slightly different concerns. The market sold off ZI due to poor earnings. The company seems challenged by the macro environment, and traders were quick to judge ZI's overall potential. Wolfpack did not comment, but Twitter traders were largely bearish, and there was not much backlash. ZI is down 68% since Wolfpack's first report.
On the other side of the tracks, we have seen a handful of stocks go against the short-sellers. One of the 'biggest' movers was Granite Construction (GVA), which jumped about 34% in the past five days. Initially, it was GlassHouse Research who targeted this construction company due to allegations of poor accounting. The report was released at the end of September this year.
Most importantly, the report believed the company is overstating revenue by prematurely recording it without reaching necessary milestones. The management allegedly also uses low-quality projects to further boost earnings, which supposedly contradicts what the management has said publicly. GVA is also apparently behind on many of its large projects.
The market disregarded GlassHouse's allegations and pushed up the shares as the company reported its earnings. The business reported strong numbers, and it seems the market did not have a hard time believing the performance is real. Twitter was bullish, but not many mentioned the short report. The activist has not released an update so far.
This week, we have seen only one new campaigns, but activists are busy updating their previous work. We saw Akram's Razor update their view on Sprout Social (SPT). Akram initially targeted this SaaS company due to allegations of overvaluation and poor business model.
Most importantly, the report believed the company is not going to be able to grow 30% or more this year. Apparently, the business managed to grow because of Salesforce's decision to drop one of its products, and customers have been switching to SPT. However, this is now ending and SPT will start showcasing slower growth. The market is apparently overconfident as investors expect the 30% growth to be there even next year.
The thesis has played out as the stock tanked recently due to poor quarterly results. However, Akram's Razor still believes there is a further downside as the earnings only bolstered the bearish arguments. In the update, they argued that the stock is still overvalued compared to other SaaS peers as the business performance is starting to fall off a cliff. They also went on Twitter to showcase how the company is distorting their core metrics within SPT's presentation.
$SPT Btw-If you are trying to figure out what type of mgmt team you are dealing with here, just look how they decided to break out their premium attach rate as accelerating during the last earnings call and investor and then run the numbers. pic.twitter.com/vcFurU7xE6— DaRazor (@akramsrazor) October 30, 2023
There was little pushback on Twitter as most people agreed with the bearish thesis. The stock is now down 26% since the initial report in March of this year. The report saw a downside of at least 54% at the beginning.
Another update we want to highlight is the volatile ride of Xponential Fitness (XPOF). This fitness company was first targeted by Fuzzy Panda due to allegations of dubious corporate governance and a broken business model.
Most importantly, the report believed the company's founder has several red flags in his corporate history. He was apparently connected to a penny stock which used Bangkok boiler rooms to try and increase the share price. He was also sued several times due to fraudulent allegations, and many people have called him a crook.
The report took a lot of heat from the market as bulls were trying to discredit some of the core allegations, but it seems investors are siding with Fuzzy for now. The stock is down 42%. However, it could have been down much more after the company released its earnings. The stock was down a further 15% at one point. The shares rebounded and recovered most of the losses. It seems that bulls still believe the upside is there, as per below.
$XPOF Bank of America note that came out yesterday is riddled with inaccuracies. We are very disappointed in the work here, it is very misleading and just articulates the consensus short narrative which is factually inaccurate.— Buckley Capital (@buckleycapital) November 2, 2023
However, Fuzzy shared that they are still short and that there is a lawsuit in the works by current and former franchisees of XPOF.
The law firms of Bovino, Praxidice, and Amaro asked us to share that they are representing franchisees vs Xponential Fitness $XPOF— FuzzyPanda (@FuzzyPandaShort) November 1, 2023
They preparing a lawsuit and 50+ franchisees have already signed up
Current & former franchisees can join athttps://t.co/IeE89CC9yw
- Bleecker Street Research targeted this USD 0.7 billion company, PureCycle Technologies (PCT), due to allegations of failure to launch its commercial operations and issues with its recycling process.
- Most importantly, the primary concern is alleged PCT failure to initiate commercial-scale production and the issues surrounding its recycling process. According to the short-seller, the company's proprietary process, which involves using butane at high pressures and temperatures, is neither unique nor high-tech and is based on a Proctor & Gamble patent that lacks a technical explanation for scaling from bench to industrial scale.
- Moreover, Bleecker alleged that PCT produced PR material showing the operation of equipment that is actually only run for the video or photo before being shut down. There are also concerns about the environmental impact of PureCycle’s process, which is roughly equal to that of virgin Polypropylene production, with a similar CO2 footprint.
- Due to all this, the short-seller sees a significant downside in PCT. The market is likely to react negatively as the company faces ongoing issues with its recycling process and the potential environmental impact of its operations.
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* Note: Presented data and analytics is as of available on 2023-11-04 UTC 12:00.
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