{"id":4151,"date":"2020-10-14T15:40:47","date_gmt":"2020-10-14T13:40:47","guid":{"rendered":"https:\/\/neu.hqam.ch\/how-to-avoid-a-potential-short-sellers-target\/"},"modified":"2023-06-12T08:32:14","modified_gmt":"2023-06-12T06:32:14","slug":"how-to-avoid-a-potential-short-sellers-target","status":"publish","type":"post","link":"https:\/\/hqam.ch\/en\/how-to-avoid-a-potential-short-sellers-target\/","title":{"rendered":"How to avoid a potential short-seller\u2019s target?"},"content":{"rendered":"\t\t
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Enron, Valeant, Luckin Coffee, Nikola \u2013 who is next?<\/strong><\/p>\n

Imagine you invest in a promising company with constantly growing market capitalization, excellent profit margins and high earnings growth. On the top of that it has good prospects of keeping this development pace. It may seem to be a successful investment and you can be proud, but only if proper plausibility check has been done. If not, waking up one morning to the news that a short seller issued a report on the company, revealing profit misstatements or other financial manipulation, can become a bitter reality. In this case, inability of the corporate management to refute the allegations and provide hard proof to deny all improper rhetoric will bring the stock price to its knees. This is exactly what has happened earlier this year to Starbucks\u2019 Chinese rival Luckin Coffee and now, to electric trucks producer \u2013 Nikola. <\/p>\n

Types of frauds and their consequences<\/strong><\/p>\n

We analyze 52 reports for the period of last 10 years (2010-2020) to understand what kind of company can become a victim of the short-sellers and which red flags a shareholder should be alerted about. Our analysis was based on the reports of well-known short-sellers: Muddy Waters, Blue Orca, Glaucus Research. Activist sellers have wide spectrum of assault\u2013 from companies that are engaged in major business model scam (23% of total cases) like forwarding of empty trucks or having fake production facilities, to companies inflating earnings and engaging in other accounting irregularities (56% of total cases). Companies, which just have poor financial conditions without any fraud evidence (21% of total cases) are also targeted. Certainly, the first type of un-scamming \u2013 when a large scale fraud is revealed- is the most efficient as it leads to a drastic stock price decline and often to the corporate bankruptcy. The eye-catching fact is that in 37% of cases analyzed, the companies were delisted within the next 1-3 years after release of short-seller\u2019s report. After studying the targets of the short-sellers, we have created a top of industries and countries, where the frauds are found most often. Investors owning Chinese companies should exhibit extreme cautiousness as country is the largest provider of the fraudulent companies with king of frauds, Sino-Forest, on the top. It is followed by USA, Canada, and Australia. One should be most careful with the following industries: Consumer Discretionary, Healthcare and Industrials. <\/p>\n

Common red flags of the potential scam<\/strong><\/p>\n

Frauds are not easy to spot. One has to diligently go through the reporting and media coverage, contacting the company afterwards. Particularly hard, if not impossible, is the detection of fake business practices. The good news is, however, that there is a whole bunch of red flags usually coming along, which helps to spot the probable fraud. We focus on most common of them. <\/p>\n

1.Exponential growth<\/p>\n