Short sellers don’t always win, and shouldn’t get the glory

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One of the stocks that our company follows got attacked this week. That’s right, Well Technologies (WELL on TSX) was the subject of not one, but two, short sell reports, designed to strike fear in the hearts of investors and drive share prices down. WELL fell about seven per cent intra-day on the day the first report was released.

We looked at the reports and the main conclusion of both was that Well’s recent $360-million purchase of CRH Medical was not a good acquisition. Maybe it will be, maybe not. But we reminded our clients that every single trade they have ever done had an equal and opposing view. That stock you love and has quadrupled in four years? Someone didn’t like it much and sold it to you. If a company you own gets attacked by a short seller the key is not to panic. That’s what the short seller wants you to do.

But the whole process got us thinking: Do any of these attacks actually work? Sure, short sellers have had past successes rooting out fraudulent companies such as Sino Forest. But what is the track record on other deals? We decided to go back and look at five short attacks and how they worked out. We did not pick and choose based on any particular criteria, we simply selected five that immediately came to mind. Note that, as we believe should be done with mass murderers, we are leaving out the names of the short sellers to deprive them of any more publicity.

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Maxar Technologies Inc. (MAXR on TSX) was attacked by the shorts in 2018. The initial attack had devastating results, with the stock dropping 13 per cent on the day the short report came out, to $50, and then getting cut in half over the next three months. The short report focused on several issues, but large debt was one fundamental concern. Seven months after the attack, the stock bottomed at $5.33 per share, and investors feared it was heading to zero. Since then, however, it has been almost nothing but up, and the stock today is back to $50. We will have to award this win to the short sellers: Sure the stock is back where it was, but long-term holders have yet to profit, even with a 201 per cent gain in the past 52 weeks.

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Exchange Income (EIF on TSX) was attacked in the summer of 2017, and the stock fell from $36 to $26 in a relatively quick period of time. This attack was ugly, with the shorter even accusing EIF’s airline divisions of skipping safety protocols. But the shares did not stay down for long, as the company continued to pay and raise its dividend, and investors bought for income. Today it is $39. That’s not a great return over nearly four years, of course, but the stock yields 5.8 per cent and has been as high as $45 not long ago. We will call this one a draw.

Badger Daylighting (BAD on TSX) was attacked the same year. Again, there was a scathing report, and tweets even accused the company of dumping waste illegally. The stock fell as much as 28 per cent on the day the report came out. Even the Alberta securities regulators got involved, aiming for, but not getting, an injunction against the short seller. Over six trading days the stock fell from $31.50 to $21. Today, the stock is $43, more than double the short-sell low in four years. Badger has also raised its dividend five times since the 2017 attack. We have to give this win to the company as shareholders who did not panic did well enough.

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GFL Environmental Inc. (GFL on TSX) was attacked in August 2020. The shorts accused the company of using dubious accounting methods to hide debt, and claimed the shares were “essentially worthless.” The accusations drove the stock down about 25 per cent in a week, to about $22 per share. It’s $41 now, and hit $45 earlier in April. More than doubling from its short sell low, the company is easily the winner of this recent battle. But the shorts really haven’t given up: The combined short position in Canada and the U.S. is currently more than 10 per cent.

Shopify (SHOP on TSX) was famously attacked in October 2017. The stock fell 20 per cent in four days as the shorter called the company “dirty,” and a “get-rich-quick scheme,” amongst other accusations. The short seller dug in his heels for a while, and attracted other sellers. But you already know how this one worked out. With another strong revenue and earnings beat this week, Shopify is up 79 per cent in the past year. Since the 2017 short report, the stock is up more than 900 per cent (not a typo). Game, set and match goes to the company.

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What’s the conclusion here? First, don’t panic. If you own a good company, ignore the short sellers, sit back or perhaps buy more from the nervous nellies. If you own a bad company (why?), your stock is likely going to decline whether the short sellers push it down the hill or not.

Peter Hodson, CFA, is Founder and Head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. Peter is also Associate Portfolio Manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned).