Bear Raids 2.0
Two weeks ago, I received an email from Prescience Point Research regarding their short selling thesis on Chicago Bridge & Iron Company (NYSE:CBI) (LINK TO THESIS). I read about a third of the report, found the allegations regarding CBI to be intriguing but quickly lost interest. I have no position in the stock, don’t short stocks and spend my analytical time on smaller companies. I printed out the report and added it to the pile of stuff that I will probably never read. I mention this because I recently looked at the report and was stunned to see that the stock had dropped over ten percent since it was published, on many times average volume.
In total, the stock has lost nearly a billion dollars in market cap over an email (stunning). However, this is no different from how The Pump Stopper took 25% off the share price of Neonode Inc. (NEON: USA) last week, or how Gotham City Research took 60% off the share price of Gowex SA (GOW: Spain) yesterday.
Until very recently, short selling was a very difficult way to make money. It has always been easy to identify frauds, overvalued companies and imploding business models, but so what. There are a whole lot of bankers, investors and mainstream journalists who are very well incentivized to ignore the obvious, and get themselves paid in the process. As a short-seller, you’re fighting against a lot of people with an desire to have you lose money—not including management of the company who will likely do illegal things to keep the charade going.
Suddenly, social media has changed the playing field forever. No longer are you forced to wait years until a company implodes—you can instead, educate the market and become your own catalyst. I call this self-catalyst investing—or the act of going out there and giving your short thesis a proper airing, by distributing it to anyone who may possibly read it. If your thesis is good and you can get enough people to pay attention, there is an instant re-rating of the share price as people circulate it amongst fellow investors and then act upon it. If I know anything about the world of finance, it’s that when a strategy is making money—this one is making people fortunes—there will be plenty of copycats. Citron and Muddy Waters invented this business. Expect to see many more people jumping on the self-catalyst bandwagon.
In addition, self-catalyst investing will forever changed the world of stock promotion. For a very long time, I would receive unsolicited emails, glossy mailers and even faxes promoting some questionable penny stock. I would often glance at the chart and become incredulous that the shares were rising rapidly on heavy volume. What sort of fool buys shares based on a glossy mailer?
In the past few months, I have been equally amazed at how many times someone e-mails me a short thesis on some penny stock that has just rallied after heavy stock promotion. As soon as the short thesis circulates, the shares rapidly deflate. Look at the chart of WINDSTREAM TECHNOLOG (OTCB:WTII).
Someone paid $900,000 to promote the stock, but the short sellers rushed in to crush the promotion after just a week. Did the promoters make their $900,000 back? I suspect that in the not too distant future, the economics of these stock promotion schemes will forever be defeated by short sellers who can deflate them before the promoters can exit.
I am amazed at how self-catalyst investing has permitted the market to suddenly become self-policing, in a way that regulators have never been able to accomplish, even with their bloated budgets and staffing. That, however, is how a free market should work. Entrepreneurial types will always find a niche that makes money and nothing beats double digit returns in less than a week. Fortunately, this niche is in exposing frauds and protecting those who are too stupid to protect themselves. Recent advents in social media, have finally allowed these self-catalyst investors sidestep the mainstream media and use their blogs along with other media resources to achieve their goals and the markets will be much safer going forward because of this. The game has changed, once again…
Disclaimer: I have no positions in any of the companies mentioned above and make no allegations of misconduct against any of them. I have no affiliation with any of the blogs mentioned in this article.