Whenever a hot sector comes under some near-term pressure, the shorts – investors who essentially bet a stock will go down – come out to play. They’re not always right or even well-meaning in their intentions. But not all of them are wrong, either.
A few weeks ago, a short-seller published a highly critical report about Aphria Inc. (NYSE: APHA). Although many of the allegations have yet to be proven, the effect was devastating with the stock falling by 40% in just two days.
It was not the first short-seller report about a cannabis stock – and it will not be the last.
In Aphria’s case, the National Institute for Cannabis Investors believed the attack created an unusual and outstanding buying opportunity. In fact, we said on December 6 that investors like yourself should seriously consider adding some Aphria to your portfolios.
From that point up to yesterday’s close of trading, Aphria is up 14.9%.
Whenever a hot sector comes under some near-term pressure, the shorts – investors who essentially bet a stock will go down – come out to play. The more aggressive shorts will publicize their reasons for thinking a stock is overvalued. This often drives the stock down, to the profit of that short.
Because they have a profit motive in bringing a stock down, it’s important to scrutinize their reports. But it’s also important to pay some attention to what the shorts are saying because sometimes they uncover uncomfortable truths about a company that supporters have missed and the company’s management would prefer to stay secret.
I want to take some time to talk about shorts generally: what they are, what they do, why it’s important to be skeptical, and why it’s also important to have an open mind to their findings.
What Does It Mean to Short a Stock?
Any stock and any stock market sector has some people who don’t believe in it. The more aggressive investors among them will “short” the stocks they think will go down. A short-seller borrows stock from a brokerage firm and sells it. The investor buys the stock back later and returns it to the brokerage. If the stock goes down, the investor profits. If the stock goes up, the investor loses.
2018 was a massive year for IPOs. In fact, it has been one of the strongest markets in nearly half a decade. More than 130 IPOs took place in the first half of 2018, raising more than $37 billion alone. And that was just the first 180 days. But it pales in comparison to what our NICI analysts are predicting for the New Year. 2019 is gearing up to see a record number of high-flying cannabis IPOs hit the market. Each capable of unleashing tens of millions of dollars from tiny grubstakes it investors just like you. And if you click here, we can show you four of them that are in line to take the industry by storm.
Shorts can also use options on many stocks that trade on a big exchange. (Aphria is on a short but growing list of cannabis stocks that trade on the New York Stock Exchange). Options magnify the gains if a stock goes down, but they have a limited time before they expire worthless. Since a short-seller who plans to release a report is hoping the report will bring attention to the seller’s concerns about a stock and cause it to go down immediately, he or she is unconcerned with the time limit on the option. Often, that’s the best way for such a short seller to profit.
Do All Shorts Publicize a Report?
You never hear a thing from most people and companies shorting a stock, just as you never hear from most of the people who buy one. But some short-sellers believe that they have found something about a stock or a sector of which few if any market participants are aware. And sometimes those people won’t wait around for the market to learn about it. They’ll issue and publicize a report hoping the new information will drive the stock down and allow them to profit.
That’s what happened in the case of Aprhia. The same happened earlier in the year in a short attack on Cronos Group (NASDAQ: CRON), which was among the biggest late-2018 success stories in cannabis with its multibillion-dollar deal with tobacco giant Altria Inc. A short-selling investment company collected all the reasons it didn’t like each stock, put it in a report, and disseminated it to the marketplace hoping to convince other market participants that it was right and that the stock deserved to go down.
Are the Short Reports Always Right?
Shorts are not always right. Again, there is often a financial interest tied to its action. However, they are not always wrong – the same is true of the reports that some of them produce to make their cases.
In some cases, the reports from short-sellers are correct and crucial to the proper functioning of the markets. Short reports helped expose frauds at Enron and Worldcom. The information the shorts provided was valuable to market participants and allowed them to make fully informed decisions, where they had previously been relying on reports from those companies’ management teams that turned out to have fraudulent information.
There are also shorts who believe what they are saying but the facts will prove them wrong. That appears to be the case in the long battle between Bill Ackman and Herbalife. Ackman became convinced that Herbalife was a giant fraud, and he shorted the stock to the tune of over $1 billion. Several investigations were unable to prove that Ackman was right – Herbalife shares increased and Ackman took a huge loss.
And sometimes shorts will see a stock as vulnerable, and they will exaggerate small things to make them look like larger problems to magnify their point. A few will even invent accusations from whole cloth.
Does Lying Get a Short Into Trouble?
Short-sellers are every bit as subject to Securities Exchange Commission rules about market manipulation as other people. So, theoretically, they can be held liable by the government if they lie. But, generally, even the worst short-sellers can get away with saying almost anything because fraud cases are difficult to prove, and the government usually has bigger fish to fry with its limited resources.
You Can’t Generalize About Short-Sellers
You can’t generalize about short-sellers. Some are telling the truth, others think they are telling the truth but are incorrect, some are exaggerating, and some are lying. Because of their important role in policing public companies, it is important to take a short-seller report seriously, but that does not mean you should believe it.
Any time you see reports from short-sellers, keep in mind that the seller has a financial incentive to make you believe what they write. Whether you do believe the report depends on what you (or your most trusted analysts) already know about a company and what other market participants think, among several other factors.
To summarize, it is important to pay attention to what the short has to say. But it is not necessary to believe the short any more than you believe other sources of information about an investment.
Keep your mind open, but keep your skeptic hat on.
Thanks for being an important part of the National Institute for Cannabis Investors,
Executive Director, National Institute for Cannabis Investors
P.S.: It didn’t take long after we aired the American Cannabis Summit for the charlatans to start coming out of the woodwork… sketchy companies promising folks they could turn $50 into $1 million. Guys that are probably working out of their mom’s basements, peddling bad information to make a quick buck. Just preying on people’s excitement. Here at the National Institute for Cannabis Investors, we know there are millions of Americans hungry for credible information on cannabis investing. Straight talk on the risks and opportunities. So we laid out a pretty bold plan. Let’s get all of the experts in the cannabis industry on the same team. We’ll create a united front. We’ll use our combined expertise to bring our members the absolute best research and the most lucrative investment opportunities in the cannabis industry. And right here, right now, we’re offering you a chance to join this elite group of cannabis investors for yourself. Just click here to learn more.
14 responses to “Be Wary of Attacks from the Shorts – But Listen, Too”
January 03 2019