IN-DEPTH: Activist short selling continues to decline
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Short selling activity has continued to fall globally, but Europe has bucked the trend.
So far this year, short sellers have published negative reports on 26 companies, down from 36 during the same period last year. The U.S. has seen only 15 companies targeted, ten fewer than the same period last year. Short campaigns in the U.S. have been on a steady decline since their peak in 2015, when activists launched 190 campaigns compared to 79 last year.
Campaigns in Asia, historically the second most targeted region, have also tumbled 60% in comparison with this time last year, with only two campaigns so far this year. There were 21 campaigns in Asia in 2021, down 35% from the year prior.
Although rising interest rates and a tepid market have helped short sellers, the falling number could be explained by a U.S. Department of Justice investigation into activist short selling tactics. Gabriele Grego, managing partner of short outfit Quintessential Capital Management, told Insightia Shorts in an email that he “was not surprised that the number of campaigns has decreased substantially.”
“There are multiple factors influencing the frequency of activist reports. Shooting from the hip we can mention the number of active firms engaged in this activity, the prevalence of corporate malfeasance, the legal/regulatory environment, and overall market dynamics,” said Grego.
Grego assumes the current decline won’t be long lasting. “Fortunately, we believe that most of these factors are cyclical rather than structural and we are quite certain that the level of activism is going to eventually revert to its mean. After all, fraud is an unavoidable human phenomenon, but so is blowing the whistle,” he added.
Europe bucks the trend
However, Europe has seen buoyant activity. There have been four European companies outside of the U.K. targeted this year, which is as many as the whole of 2021 and is the joint highest amount of campaigns year to date.
Regulators and the public opinion have become more willing to accept short sellers after some of them blew the whistle on Wirecard’s dubious accounting practice for years, only to be ignored. The short selling community was vindicated when Wirecard admitted fraud, while German markets regulator BaFin, which had refused to launch an investigation into Wirecard and instead attacked short sellers, has been embarrassed.
“Interestingly, in the post-Wirecard world, Europe has become a remarkably short-seller-friendly jurisdiction, so we plan to increase our focus there for the foreseeable future,” Grego told Insightia. “We are in the early stage of due diligence with a couple of suspected fraudulent companies located in Europe.”
There have been three reports published on German companies so far this year, two of them were written by Ningi Research. Germany saw only one short campaign in the whole of 2021 and two the year before that.
Viceroy Research this year went after Samhällsbyggnadsbolaget (SBB), the seventh Swedish company to be targeted by a short seller according to Insightia Shorts data, describing the “debt fueled” company as “uninvestable.” The short seller said it had discovered several undisclosed relationships between SBB’s board members, with most directors dealing in property and investing heavily in competitors.
Tech overtakes healthcare
A trend that has slowed since the pandemic hit in 2020 is activist short sellers targeting healthcare companies as commonly.
In 2019, 62 healthcare companies were targeted by short sellers, more than any other sector. Subsequently, technology companies have taken the mantle of the most targeted sector. Eight technology companies have seen negative reports from short sellers year to date, including four software companies.
ShadowFall Capital & Research published a report on U.K. company Darktrace at the start of the year in the belief the company’s growth strategy is unsustainable. Jim Chanos said cryptocurrency platform Coinbase is bound to fall due to stiff competition across exchanges, Ningi accused Northern Data of pumping and dumping its stock, and White Diamond Research said IronNet is “doomed to fail” thanks to its tendency to “lose too much money with no revenue growth.”