Activist Shorts Weekly W21

  2. 2024
  3. May
  4. Activist Shorts Weekly W21
Activist Shorts Weekly W21
  • This week, we have registered five new major calls. 
  • The biggest impact was done by NINGI Research who targeted Oddity Tech (ODD), a beauty company from Israel due to allegations of questionable accounting. Most importantly, the report believes the company has misled investors about its business model and concealed key aspects of the actual business to supposedly inflate profits and revenues before the IPO. While the stock is now down 10%, the company has faced quite a bit of pushback. 
  • The second biggest impact was felt at Lithium America (LAC), another lithium target. Bleecker wrote about the company due to allegations of poor business model and questionable corporate governance. The company is apparently touting a project that is uneconomical and has not been done before. Bulls disagree. 
  • We also saw a new campaign by Jehoshaphat targeting heavy machinery business, Grizzly Research coming out with their first 2024 pick of yet another China Hustle 2.0, and we also saw a new pick from J Capital, who wrote about nutraceutical company product of which apparently poses significant risks to customers. 
  • Lastly, we are tracking the most recent stock price gyrations at several previous targets. We focus on the new campaign by Bleecker, a declining mental health provider and a rebounding Indian conglomerate. 

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Bits and Pieces

  • Head of ShadowFall is seemingly referring here to their only disclosed short, a short in VusionGroup
  • Viceroy steps up their effort at Arbor (ABR). The stock is still down just 1%.
  • LUXH's downside sees fresh lows. The stock is down over 93%. 
  • Is GL under SEC investigation? Management denies. The stock is up 3% since Viceroy targeted the insurance business. 

Big Movers

 

This week, we have seen plenty of stocks move in the right direction for the short-sellers. One of the biggest movers in the right direction was a new campaign targeting LifeStance Health Group (LFST) which plunged by 21% in the past five days. Initially, it was Hindenburg Research who targeted this mental health provider due to allegations of dubious business model and questionable corporate governance. 

Most importantly, the report believed the company is dropping quality standards in order to chase revenue and income. Apparently, the company's churn rate in clinicians is higher than what the SEC filings showed previously. The mix of therapists and psychiatrists (higher margin) is also worsening as Hindenburg believes 79% of providers are therapists instead of two-thirds when the company was disclosing the mix. This creates further pressure on the company to boost profitability as cash is dwindling due to significant quarterly cash burn and legal issues connected to the IPO. 

While at first, the campaign has run into challenges as the market somewhat ignored the red flags, it now seems traders are coming around to it. The reason for the decline in price this week is due to a significant sale offering from an insider at a discount to the market price. Many Twitter traders noted that this is bearish as it shows a lack of confidence in the management team.

At the same time, there were still bullish voices that talked about the fundamentals as being strong. Despite the recent move and the negative optics of the secondary, the stock is down just 3% so far. The activist did not provide an update, but it will be interesting to track the developments. 

Another stock that went in the right direction for short-sellers was Lithium Americas (LAC) which is down about 15% in the past five days. This is a new campaign released this week by Bleecker Street. The activist targeted this $633m junior miner due to allegations of an unviable business model.

Most importantly, the report believes the company's efforts to produce a viable source of lithium are unlikely to ever pan out. At current prices and even using the company's own inputs, the NPV of the project is zero. What is more important is that allegedly LAC's purported technology of extracting lithium from clay deposits is questionable. Bleecker believes the expert consensus that doing so at scale is not viable in the near future. LAC is supposedly proposing a solution that just clobbered together off-the-shelf products without much R&D. 

Moreover, LAC's finances are raising significant red flags. The company did manage to get a governmental loan, but it will apparently need to raise more money to even get the loan. Bleecker believes LAC will need to dilute shareholders by an additional 50%. LAC does have GM's investment, but this again allegedly dilutes investors and does not get LAC to production. 

Due to all this, the short-seller sees a significant downside. The market is likely to eventually sell the shares as the company will need to continue to dilute investors to get closer to their goal which is apparently not feasible in the first place. 

As the price action suggests, the market has somewhat taken Bleecker's allegations seriously and put selling pressure on the shares. However, there are quite a few vocal lithium bulls that are going against Bleecker and allege that there are key mistakes in the analysis. The company did not respond, while the activist turned the heat on the bulls as they point out the apparently flawed analysis of the DOE loan by the bulls. 

On the other side of the tracks, we have seen only a handful of stocks go against the short-sellers. One of the biggest movers was Adani (, which jumped by about x% in the past five days. Last year, it was Hindenburg who came out with a lengthy report against the Indian conglomerate 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 then was used by the insiders to pledge their shares and raise debt. 

While the campaign had seen early success, it became obvious that this is a long fight with uncertain results due to all the connections of Adani to the Indian government. The shares of Adani Enterprises (just one stock out of many from the group) are now essentially back up. The stock is now down just about 9% since the Hindenburg expose came out. However, the activist mentioned that while the business is rebounding the fraud allegations are not going away. 

    As per usual, the replies to this tweet were filled with a lot of enthusiastic supporters of India. 

    Lot of new campaigns, lot of reactions

    This week was somewhat of a rebound in terms of new campaigns. After relatively quiet weeks, we saw five new campaigns. Perhaps the most impactful campaign seemed to have been released by NINGI Research. The activist targeted Oddity Tech (ODD), a $2.1bn beauty company, due to allegations of dubious corporate governance. 

    Most importantly, the report believes the company has misled investors about its business model and concealed key aspects of the actual business to supposedly inflate profits and revenues before the IPO. The company allegedly concealed significant brick and mortar business in Israel despite claiming they are focused solely on digital sales. Further disclosures also raise significant red flags and the whole accounting department is apparently questionable.

    Moreover, the company's recent growth was also likely due to allegedly luring customers into non-cancellable plans which then artificially inflates churn and other metrics that the management can use to impress investors. In reality, the activist claims the company has not disclosed many lawsuits that are aimed at this behaviour.

    Due to all this, the short-seller sees a significant downside opportunity. The market is likely to eventually sell the shares as the true fundamentals will come to light and showcase the true nature of the operations. The report impacted the stock on the first day as investors sold the shares. There was somewhat of a rebound, but it seems to be limited as the past two trading days were relatively flat. The stock is down about 10% so far. 

    While the impact was felt, the company quickly came out with a response targeting some of the key points. They discussed the revenue contributions of the stores and few other points. The activist was not satisfied as they believe the company choose to omit certain information. 

    A day after the report, Fiat Lux came out with their own analysis of the report and pushed back on some of the arguments, highlighting alleged mistakes by NINGI when doing the analysis. 

    Another stock that has seen selling pressure after the report was Toro (TTC). Jehoshaphat targeted this $9bn heavy machinery business due to allegations of dubious corporate governance. 

    Most importantly, the report believes the company has been pulling forward revenue and cash collection. TTC is allegedly not only pushing product to its dealers, but also finances these sales through an unconsolidated JV. This apparently created a significant hole in the future cash flows of about $400m which will impact free cash flow that the market is not expecting since DSO is not showing any strain given the JV being unconsolidated. The financing partner is apparently not going to continue to finance the sales.  

    Moreover, the company's adjusted operating margin is allegedly overstated as it is helped by numerous accounting irregularities. The activist also wonders whether Home Depot, a previously significant customer, is dropping TTC from its offering. Apparently, there is plenty of evidence while the street is not thinking about this as a potential scenario. 

    Due to all this, the short-seller sees a significant downside opportunity of up to 60%. The market is likely to eventually sell the shares as the valuation does not support the alleged holes in the cash flow that the activist uncovered. The shares started to drop after the report and continued to be under pressure in the days after. The company did not issue any response, and the Twitter reactions were relatively muted; only a few picked up the report, and most of them were bearish, as can be seen below. 

    Grizzly Research came out with their first pick of 2024 and they went right for another alleged China Hustle 2.0 stock. The activist targeted, GigaCloud Tech (GCT), a $1.2bn HK-based US-listed e-commerce company due to allegations of classic China Hustle 2.0. 

    Most importantly, the report believes the company has been lying about its revenue and other key metrics. The stock recently rose on the hopes that a new B2B platform is driving a lot of revenue growth, but the activist does not believe this is true. The websites are apparently showing less than 50 visits a month, and even at the peak, it was just about 1,000 visits per month. This supposedly does not square with the revenue the company is generating from the platform. Furthermore, the company allegedly operates a web of complex related-party transactions that both mask activity on the platform itself and also contribute fake revenue to financials. 

    Moreover, the company is also supposedly using cost to further inflate revenues. Through employee interviews, Grizzly found out that the company apparently books its last-mile efforts as revenue, but in reality, it is likely to outsource this service. The US exports also raise significant red flags. The company has processed millions of dollars of merchandise with allegedly dubious entities that feature fake addresses, little to no commercial activity, and other hallmarks of fraud. 

    Due to all this, the short-seller sees a significant downside opportunity. The market is likely to eventually sell the shares as the business will eventually have to come out with clean fundamentals. The report drew quite a bit of attention, but it was mostly bulls on Twitter defending the business. The company released a response day later and attacked Grizzly's allegation about the site visits and the related-party transactions. The stock held its ground and is up 2% since the report. It should not be forgotten that Culper targeted the company for similar reasons in September of last year. 

    Last but not least, we also saw a new campaign from J Capital Research. The activist targeted biote (BTMD), a $353m nutraceuticals company, due to allegations of serious product concerns. 

    Most importantly, the report believes the company's hormone treatment is dangerous and harmful to the patients. The company supposedly received far more adverse events than they reported, including the development of breast cancer, and the suppliers are allegedly dubious as the FDA told them that their facilities are unfit to produce BTMD's program. The clinicians are apparently unaware of the dangerous side effects and the lack of a proper supply chain. 

    Moreover, the management team raises red flags. The company switched two CFOs in 2022 and the CEO was previously connected to a brian scan clinic which was called a scam on Reddit and which has supposedly dubious operations. In 2017 the CEO was formally accused of fraud.

    Due to all this, the short-seller sees a significant downside opportunity. The market is likely to eventually sell the shares as the lack of quality and transparency is going to come out. Despite the allegations, the stock has not dropped. The shares are actually up about 2%. The company did not respond, and Twitter was mostly filled with just people retweeting the report, although some were interested in the short thesis. 

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    * Note: Presented data and analytics is as of available on 2024-05-24 UTC 12:00.

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