Activist Shorts Weekly W39

  2. 2024
  3. Sep
  4. Activist Shorts Weekly W39
Activist Shorts Weekly W39
  • Last week, we have registered four new major calls. 
  • Again, we had a busy week with some heavy hitters releasing new reports. Gotham came out with their second report of the year. This time, they focused on another German investment vehicle due to allegations of dubious corporate governance. Apparently, this could be a repeat of Aurelius. The stock is down 16% so far. 
  • Blue Orca came out with a new report on a manufactured homes REIT due to allegations of questionable accounting and poor corporate governance. Apparently, the fundamentals are skewed by several accounting machinations. The stock has not reacted much so far. 
  • Grizzly Research came out with a classic China Hustle pick. A fintech based in China apparently has all the hallmarks of fraud. The company's SAIC filings do not match; the key shareholder is likely using the entity as his personal piggy bank, and much more. The stock went against the short-seller on the first day. 
  • Hunterbrook also came out with a new report targeting an RV manufacturer. Allegedly, the company has a poor track record and is now facing product issues, which could cause a recall, lawsuits, and overall questions about the supply chain. The stock also did not move much. 
  • Lastly, we are tracking the most recent stock price gyrations at several previous targets. We focus on Gotham's new report, a declining Chinese Hustle stock, and a rebounding data center business. 

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Bits and Pieces

  • B. Riley Financial, Inc. (RILY) sees further credit problems. The stock is already down 90% since Friendly Bear wrote about it for the first time. 
  • NuScale Power Corporation (SMR) is losing a customer, but stock is slow to react, according to Iceberg. The stock is up over 135% since the activist wrote about the situation.
  • Viceroy continues to see significant red flags with MPW. The stock is now down about 52% since the first report. 
  • Iceberg's piece on New Found Gold Corp. (NFGC) is getting traction. The stock is holding so far and is up 3%. 

 

Big Movers

This week, we have seen plenty of stocks move in the right direction for the short-sellers. One of the biggest movers that went in the right direction for short-sellers was the new campaign targeting Mutares SE (MUX), which was down about 23% in the past five days.  It was Gotham who targeted this $604m German investment company due to allegations of dubious accounting. 

Most importantly, the report believes the company's revenue seems circular. The business reported over 313m EUR net income in the past few years, yet the company burned over 114m EUR in the cash flow statements. The receivable line item connected to portfolio companies grew over 280m EUR in the same period. This apparently suggests the company's revenue might be an alleged accounting construct. The holding company books revenues but does not collect them on the invoices. The dividend payments were supposedly funded by debt and external capital, not cash flows, which MUX is in a tough financial position. 

Moreover, the company's investments are in trouble, and the challenges to maintaining a facade of profit are only going to get tougher. The holding company's burn is now over 400m EUR per year with a significant debt load already in place. The efforts of the management to improve the portfolio companies and set them up for success are allegedly not yielding much value, as about 50% of the companies sold in the past nine years were supposedly problematic. The company also allegedly sold several companies to an individual tied to MUX, making these undisclosed related party transactions. 

Due to all this, the short-seller sees a significant downside opportunity. The market is likely to eventually sell the shares as the activist identified many common points with Aurelius, a similar business that Gotham targeted. Aurelius ended up collapsing due to many of the same signs, which can now be seen with MUX. The stock quickly reacted and is now down over 16% since the release of the report. However, you could see that Gotham was building a position before the release due to the European disclosure system. 

The reaction of the market was mixed. While the shares dropped, there were quite a few German Twitter traders who went against Gotham and said that the report went beyond what is reasonable and that the main points do not hold. The company also went out and first just rejected the report but then followed up with a bit more detailed rebuttal. The content was nothing out of the ordinary. The activist did not yet react. 

Another stock that went in the way of the short-sellers was Ispire Tech (ISPR) which is down about 12% in the past five days. It was JCapital Research that targeted this Chinese-based vape business due to classic China Hustle 2.0 allegations.

Most importantly, the report believed the company was overpaying for its factory, and the money was lining up the pockets of ISPR's chairman. The factory is supposedly able to achieve a net profit while ISPR is losing money per vape and lags competitors by a mile. ISPR's gross margins are stuck at 16%, while others allegedly earn around 70%. The co-CEO has been accused of extortion and violations of drug law. 

The campaign was mostly accepted by the market. The stock is now down 40% and it has been trending lower for some time. However, this week, it seems there could be another bullish angle trying to revive the investment thesis. The company released its earnings, which prompted some Twitter traders to discuss whether ISPR could actually start making money in different geographies. That being said, this is still far from countering the main allegations. The activist did not update their thesis. 

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 Applied Digital (APLD), which jumped by about 37% in the past five days. The main activist on APLD's case is perhaps Friendly Bear who wrote about the business about a year ago due to allegations of dubious corporate governance. 

Most importantly, the report talked about APLD's dealings with RILY and how the investment bank is allegedly controlling managerial decisions to the detriment of APLD's shareholders. One example is APLD's decision to pay down debt from RILY ahead of maturity at a time when RILY needed cash for an acquisition. 

While RILY continues to crash, APLD is soaring. The reason behind the rebound is mostly the news connected to NVDA's investment in the business. This countered some of the allegations and created a new bullish thesis which is holding for now. However, bears are still skeptical. Although as per tweet below, it seems some short-sellers are adapting to the market and are trying to also profit from what could be a squeeze. APLD is now down just 17% since Friendly Bear wrote about it. 

Another busy week

Apart from Gotham's new venture into the muddy waters of European capital markets, we also saw three other activists coming out with their latest takes. 

First, it was Hunterbrook who targeted Winnebago (WGO). The activist targeted this $1.6bn RV manufacturer due to allegations of a dubious business model. Most importantly, the report believes the company's key product has issues with its frame. This issue which has been witnessed by many is now apparently urgent enough to push for a recall. However, WGO has been apparently censoring and muting any voices that point to the issues. The company has also settled several lawsuits. The units sold are in the billions, and therefore, any risk coming out of this could be extremely significant. The company said that the frame issue is allegedly not a concern. The activist believes otherwise and points out that the frame issue could be an industry-wide problem due to the main supplier of the RV industry. 

Moreover, the company is losing market share, and inventory at dealerships is piling up fast, which could signal over-shipping or lack of sales. The company is supposedly also getting heat from the warranty side. The business managed to keep warranty costs low but was apparently at risk of litigation. Lawsuits are starting to point out that the warrant might using loopholes, some say class action could be an additional risk. 

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 going to be able to keep warranty costs down and shield the market from news about the true extent of the frame issues. 

The stock did not react much so far. The shares are down just about 2% since the start of the week. Twitter reactions were mostly positive. There are few bearish accounts who went onto to support the allegations with customer complaints. 

The company rejected the allegations but did not provide a detailed rebuttal. There were not many bulls coming out to support the stock. 

The second campaign of the week was by Blue Orca, who targeted Sun Communities (SUI). The activist targeted this $16bn REIT (manufactured homes/RV) due to allegations of dubious corporate governance.

Most importantly, the report believes the company is improperly accounting for CapEx. Blue Orca believes SUI inflated its non-recurring CapEx, which is then inflating its AFFO. Apparently, the management did so by 48% last year and even more in the previous one. The reported organic growth is supposedly raising red flags as well. Due to apparent machinations with the meaning of certain yearly/short-term assets, the company overinflated the growth by a third in the past two years.

Moreover, the management's track record should be an alleged concern for the shareholders. The CEO had run-ins with SEC before, and while it never led to action, the questions remained. Apparently, he has also been taking out undisclosed loans from board members which then questions the independence of certain board members. The CEO also seems to be embroiled in a lawsuit concerning life insurance of his mother. Certain parties believe he was behind the alleged scam and he should be in jail. 

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 not be able to hide deteriorating fundamentals and red flags of key insiders. The market did not offer much reaction. Twitter traders were mostly agreeable, but mentioned that REIT investors do not apparently bother to read much as long as they get their dividend. The stock is now down just 2%. The company did not release a rebuttal. 

Last but not least, we saw Grizzly Research write about Qifu Technology (QFIN). The activist targeted this $4.3bn Chinese-based fintech company due to allegations of classic China Hustle allegations.

Most importantly, the report believes the company is apparently significantly overstating its financials according to SAIC data. The activist believes almost all of the net income could be fake. The loan delinquency is supposedly skyrocketing which results in increased accounts receivables. These are apparently used to manipulate the accounting, not to mention that QIFN might be secretly overleveraged as they guarantee a large number of loans off-balance sheet. The supposed missing cash then puts into question the dividend of QIFN and the share buyback program. The regulator also might actually act against the company due to complaints.

Moreover, the management has plenty of supposed red flags. The controlling shareholder apparently has a terrible track record with other public companies and has faced fraud allegations before. The shareholder apparently controls a related party, which allegedly helps doctor the financials. QFIN also guarantees loans to supposed related parties without specific benefit to QFIN's shareholders. 

Due to all this, the short-seller sees a significant downside opportunity. The market is likely to eventually sell the shares as the company's fundamentals are simply unsustainable. The market did not seem bothered. There were few reactions, and most of them shrugged off the allegations. The company also did not bother to react to the report. The stock, however, went against the report quite clearly. At first, the shares dropped but eventually made their way up 6% on the day of the report. This is not uncommon in Chinese stocks and it will be interesting to see whether the shares continue to rise. 

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* Note: Presented data and analytics is as of available on 2024-09-27 UTC 12:00.

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