Activist Shorts Weekly W23

  2. 2024
  3. Jun
  4. Activist Shorts Weekly W23
Activist Shorts Weekly W23
  • This week, we have registered four new major calls. 
  • We saw Hindenburg report on Axos Financial, Inc. (AX), a bank that is supposedly lending to criminals and has heavy exposure to the troubled commercial real estate in New York. Previously the stock has been targeted by four other activists. The stock sold-off, but since somewhat rebounded. 
  • Scorpion Capital went against Lasertec, a Japanese-listed company dealing with semiconductors. According to the activist, the hot industry is apparently harboring fraud. As per Scorpion, the company's accounting shows significant red flags, and the management is supposedly running a CapEx fraud. The stock has been under pressure. 
  • Kerrisdale is sticking with its strategy of hitting popular retail stocks. This time around, they announced launching a 'war' against bitcoin miners. They targeted Riot Platforms, Inc. (RIOT) and called its business model nonsensical. The activist called for changes in Texas energy policies. The activist faces the usual backlash on Twitter.
  • Lastly, we are tracking the most recent stock price gyrations at several previous targets. We focus on the fourth new campaign which saw an early success, Scorpion's new pick and a rebounding fitness company. 

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Bits and Pieces

  • Hindenburg takes another regulatory win. HF Foods (HFFG) is down over 81% since the initial report. 
  • The Toro Company (TTC) reported earnings and the stock jumped, but Jehoshaphat Research remains bearish. The stock is now up 1% since the initial report. 
  • NINGI continues to spot red flags with Oddity Tech (ODD). This time about its online sales. 
  • Muddy's victory lap for DLocal (DLO). The stock is down over 40% in the past two months alone. 

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 Cibus (CBUS), which plunged by 26% in the past five days. It was Bonitas who targeted this $300m seed technology business due to allegations of a dubious business model.

Most importantly, the report believes CBUS' tech is unlikely to generate much shareholder value. The company has had a tough time generating any revenue from its gene-editing technology in the past 20 years and has apparently little to show for when it comes to serious and scalable institutional interest. The report also questions the validity of the claims connected to the technology as its first commercial product, which was later sold, was actually a product of a 'petri dish' accident. 

Moreover, Bonitas also targets the management team and points out alleged red flags connected to corporate governance. The CEO apparently has a track record of lawsuits connected to insider trading, unjust enrichment, and other breaches of fiduciary duty. CBUS is now allegedly just another installment as CBUS went public through reverse merger and the goodwill associated with the merger was written down by 33% just within 12 months of operating as public company which apparently raises questions whether investors were not misled about the potential of the technology. 

Due to all this, the short-seller sees a significant downside opportunity. The market is likely to eventually sell the shares as the company is going to continue to struggle to generate revenue and manage its cash balance. The company has cash only until about September of 2024.

The stock started to slip already before the report and the release only solidified the downside. The reaction of the market was, therefore, positive regarding the allegations, and the company did not respond to the report; they just released a list of events that the company will participate in in the upcoming weeks. Twitter chatter is also quiet as there are not many threads talking about the fundamentals. 

Another stock that went in the right direction for short-sellers was the new campaign by Scorpion targeting Lasertec which is down about 15% in the past five days. The activist wrote about a Japanese-listed company Lasertec. The activist targeted this $21bn semiconductor-related company due to allegations of fraud.

Most importantly, the report believes the core technology is having severe issues that are in stark contrast to what the management is trying to portray. This failure is then hidden behind fraudulent accounting, especially inventory levels, which are apparently exceptionally high. The new product is allegedly a hoax and merely a campaign to try and save the business in the face of the initial failure. Some of the company's customers are allegedly ceasing to buy from Lasertec. 

Moreover, the company has purported a CapEx fraud with its innovation park. Investigators found little to no activity in the park, suggesting that the company's claims about all the results are likely fake. This is especially worrisome since this R&D effort has been the costliest for the business since its inception. 

Due to all this, the short-seller sees a significant downside opportunity. The market is likely to eventually sell the shares as the company will be unable to keep up its accounting games and at the same time face competitors and angry customers.

The stock got pressured and is now down over 10%. The company released one of the shortest statements about the campaign, simply just denying all the allegations. This obviously did not provide much, but the market seemed to have calmed down somewhat. Although it seems the shares are slowly heading lower each day. This two sentence refutation was later supplement by a two pager release, but Scorpion sees even more issues after the response. 

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 Xponential Fitness (XPOF) which jumped by about 20% in the past five days. Initially, it was Fuzzy who targeted this fitness company 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. 

It seems the market is willing to give a pass. This week the company gave a presentation which apparently assured investors that the situation is now changing and under control. Twitter traders seemed to agree and most of the recent threads were bullish. Fuzzy did not offer an update on the situation. The other bears remained quiet as well for now. The stock is now down 53% since Fuzzy first wrote about it. 

Heavy hitters back on the scene

This week, we also saw Hindenburg and other well-known activists come out with new reports. Hindenburg came out with a report on Axos Financial (AX). The activist targeted this $3bn bank due to allegations of poor corporate governance.

Most importantly, the report believes the company is overly exposed to a troubled sector, NY-based commercial real-estate (CRE). While peers usually allocate below 20% to this asset class as they went away from the distress, AX has doubled down on the class, and it is now supposedly representing 53% of the total loan book. This is at the same time as foreclosure are apparently increasing and the industry insiders are talking about bloodbath.  

Moreover, the company's underwriting is allegedly riddled with significant red flags. The company has supposedly once extended a loan representing about 5% of the tangible book to a person with a criminal record. He was indicted personally twice and third time it was his company. The deal is allegedly already facing trouble. However, AX is notoriously using the 'extend and pretend' technique, which allows borrowers to avoid default with fresh loans. This is allegedly showcasing just how much some of AX's assets are in distress. 

Due to all this, the short-seller sees a significant downside. The market is likely to eventually sell the shares as the company will simply hit issues in its CRE portfolio which they will have to show in the accounts. At first, the stock sold off sharply and was down over 17%, but it relatively quickly rebounded, and it seems there is somewhat of a pushback on Twitter. The stock is now down 1.5% as it recovered most of the losses. The company's response was apparently inadequate and Hindenburg mentioned they remain short. 

Hindenburg follows in the footsteps of several activists who were vocal against AX. The earliest campaigns came out around 2015 when Friendly Bear wrote about it. The activist is still questioning the stock and follows the updates. 

Otherwise, FFJ targeted AX in 2017, Marcus Aurelius at the same time as Friendly Bear in 2015 alongside Real Talk Investments (activist which is no longer active since 2017). Apart from Hindenburg, we also saw a new

Last but not least, we saw Kerrisdale again focus on a meme-related crypto stock, RIOT. The activist targeted this $2.6bn crypto business due to allegations of a poor business model. 

Most importantly, the report believes the company's mining never made sense in the first place. The business never created positive cash flow and the management has decided to significantly dilute shareholders in the past. For example, in April alone the company diluted existing shareholders by 18%. This is at the back of declining profitability due to the latest halving and intense competition in the mining space.  Not to mention the amount of alternative ways for bitcoin exposure. 

Moreover, the company is apparently facing challenges with energy. The previously friendly jurisdictions are now seemingly turning their back on the industry as they focus on the consequences of bitcoin mining on the environment. Texas is apparently undergoing several changes which is likely to create challenges for companies like RIOT. 

Due to all this, the short-seller sees a significant downside opportunity. The market is likely to eventually sell the shares as the company is not making money and continues to dilute shareholders. 

The market did not react much; the shares sold off initially but now regained all of the losses. Twitter is obviously full of RIOT bulls who hate Kerrisdale. The activist also ruffled further feathers with this interview for Yahoo Finance, where the activist mentioned that they do not see bitcoin mining lasting for more than five years. 

As is usual, further volatility in Kerrisdale's campaigns is to be expected.

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* Note: Presented data and analytics is as of available on 2024-06-07 UTC 12:00.

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