January 8, 2016
Activist Shorts Research A look back on the best ca!s of 2015 and campaigns to watch in 2016!
Activist shorts had another big year.! Short campaigns saw an average campaignlength return to the company of about -20 percent. We also saw the debut of dozens of new activist short-sellers. ! Among the flurry of shorts, we would like to highlight some of the best calls of the year.!
Winter Quarterly Report
! We bring you our:! 2015 Fraud Call of the Year,! 2015 Non-Fraud Call of the Year,! 2015 Short-Seller of the Year,! A review of new and noteworthy short-sellers,! and! Five new campaigns to watch closely in 2016!
! ! www.activistshorts.com
January 8, 2016
2015 Fraud Call of the Year: Tianhe Chemicals Group Ltd Anonymous Analytics
In our Summer Quarterly, we discussed the challenges of anonymity with short-seller and self-styled righter of corporate wrongs Anonymous Analytics. Anonymous remarked that it attempted to overcome these hurdles by producing superior and high quality work that stands on its own. We certainly think Anonymous has achieved its goal.!
Exchange: Hong Kong Announced: 9-2-2014 Market Cap at Announce: $7.61 billion Market Cap Today: $3.74 billion Price at Announce: $2.43 Price Today: Halted Return since announcement: -51.9%
Focused mostly on fraud and Chinese corporations, the short-seller has issued lengthy reports on eight companies so far. One of these companies, a $7.6 billion Chinese chemical manufacturer called Tianhe Chemicals, was the subject of a 67-page report detailing its financial "alchemy" late last year. ! In its report, Anonymous said Tianhe was "a massive fraud and one of the largest stock market scams ever conceived." Asserting that Tianhe generated only a fraction of its reported profits, the short-seller alleged that its revenue was 85% overstated, that its net income was 100% fabricated and that Tianhe had even gone so far as to create two sets of books for diﬀerent auditors.!
Although it might be said that Anonymous' September 2014 fraud allegations predate our scope here, even the most successful short-sellers can spend days or years waiting for vindication, and Tianhe would demonstrate this truth as its protracted struggle continued throughout 2015. At one point, Tianhe would even accuse Anonymous of fabricating the very financial documents in its short report, including forging its chairman's signature. ! Even more, Morgan Stanley rallied in support of the company, stating that it was "resolutely behind Tianhe's world class management team." According to Reuters, the bank's Private Equity Asia unit spent more than $2 million on third-party diligence work prior to its 2012 acquisition of a minority stake in Tianhe. Its 8.9% position represented the private equity firm's largest equity investment in Asia, and the bank was a third sponsor of Tianhe's listing.! However, Anonymous persevered, issuing multiple responses to Tianhe's numerous rebuttals and writing an open letter to the company's auditor. The Associated Press also followed up with a report detailing its own two-month investigation into Tianhe, which confirmed many of Anonymous' claims. Then, in early 2015, the company curiously halted its shares a second time. Tianhe has not resumed trading since. On top of that, Deloitte ominously resigned as its auditor this past September.! Indeed, Tianhe has frittered away over half of its life as a public company with its shares halted. We're certainly impressed, as Anonymous' assertions represent the most sizable major business fraud allegations we've ever followed. In fact, at the time of the first allegations, Tianhe's market capitalization was 1.6x larger than that of SinoForest, the infamous forestry company that brought Muddy Waters into the limelight in 2011. For this, we award Anonymous Analytics our 2015 Fraud Call of the Year.!
January 8, 2016
2015 Non-Fraud Call of the Year: Cheniere Energy, Inc. Kynikos Associates
Ticker: LNG Exchange: NYSE MKT Announced: 9-9-2015 Market Cap at Announce: $13.4 billion Market Cap Today: $8.75 billion
"A looming disaster" is what Kynikos Associates' Jim Chanos called the liquefied natural gas (LNG) space in a September interview, noting that he had been negative on the industry for six months. Chanos said LNG was viewed as a savior for natural gas, as a way to fill an incredible energy demand in Asia. But he said the problem was that "everybody figured this out...at the same time."! The result, according to Chanos, was a massive buildout of excess capacity, which he said would increase as much as 80% in six years. Yet, he said LNG demand was no longer growing, while debt-laden plants flooded the market. With that, Chanos unveiled his short on Cheniere Energy, a LNG developer with plans to become the first exporter from the lower United States.!
Over the next few months, Chanos elaborated further, noting that investors saw Cheniere's 20-year "take-or-pay" contracts as safe. Yet, the short-seller said Price Today: $34.97 the contracts only covered 87% of the company's commissioned capacity and represented less than half of its "dream" $4.1 billion EBITDA. He added that Return since announcement: -38.4% Qatar's willingness to renegotiate similar agreements called into question the sacrosanctity of "take-or-pay" in a declining commodity environment. Chanos also related that the remaining 13% of capacity was uncontracted and would struggle to break-even. As a result, he said the company would have to depend on the disarrayed spot market, but he noted that Cheniere's margin assumptions implied a premium to spot prices. ! Price at Announce: $56.75
In sum, Chanos said Cheniere's reality was an annual EBITDA of $1.7 billion generated by contracted volumes, with diﬃculties in finding buyers that would commit to long-term contracts and an average utilization rate for its liquefaction terminals of only 88%. The short-seller added that even if all of its contracts were honored, Cheniere would still face a $30 billion debt burden from its build-out. Chanos, our harbinger of Enron, thus concluded that after subtracting $1 billion in depreciation for equipment located in Louisiana swamps and $2 billion in annual interest, returns to shareholders would be de minimus.! Not everyone agreed. In particular, Cheniere was one of Carl Icahn's activist targets. Icahn disclosed an 8.2% stake in August, took two board seats and announced plans to discuss “operations, capital expenditures, financings and executive compensation.” Icahn, along with Cheniere's board, would later oust Cheniere's co-founder, chairman, president and CEO Charif Souki, who also happened to be the highest-paid CEO in corporate America in 2013.! But Icahn's involvement didn't stop Cheniere's tumble. In fact, shares have plummeted 37% since Chanos' September interview. Yet, Chanos has been bearish on LNG even longer, at least as far back as Cheniere's highs earlier in 2015. The Wall Street Journal also recently remarked on natural gas, saying, "It’s odorless, invisible and very, very dangerous for energy investors." That certainly appears to be the case for Cheniere—Chanos' so-called "great white elephant" has shaved almost $5 billion oﬀ its $13.4 billion market capitalization, while the short-seller remains undeterred by smart shareholders. For this, we award Kynikos Associates our 2015 Non-Fraud Call of the Year.! www.activistshorts.com
January 8, 2016
2015 Short-Seller of the Year: Citron Research#
Founded by Andrew Left, Citron Research has one of the longest published records as a short-seller, with a chronicle of frauds and terminal business models stretching back to 2001. Adding to Citron's 14-year track record of successes, 2015 was a banner year for the short-seller, packed full of that for which it is best known: lively short reports and market-toppling tweets. !
Founder: Andrew Left Founded: 2001 Average Target Company Return: -15%
Starting oﬀ its memorable year, Citron asserted in late 2014 that GoPro's share price would fall from around $84 to $30 within 12 months. Yet, Citron suspected that GoPro would be fortunate to maintain even that price, as the short-seller predicted that the consumer electronics corporation could not become the media company Wall Street had envisioned. After an early run-up in the beginning of 2015, the stock reached Citron's target a month ahead of schedule, breaking $30 in late September. GoPro continued to tumble below its IPO price through November.!
Number of Campaigns: 55 tracked since 8-12-2008
Near GoPro's peak in mid-summer, Citron expanded its allegations with a short on Ambarella. Citron asserted that the $4 billion video chip maker rode GoPro's coattails up to its oversized enterprise value, a valuation that Citron said exploded faster than Uber's. But, Citron warned that Ambarella soon faced commoditization and a declining technological edge. As the short behind Plug Power, our 2014 Valuation Call of the Year, Citron certainly knows bubbles, but this bubble burst even faster than expected—in just six months, Ambarella has already fallen past Citron's 12-month target of $60.! Citron called a second bubble in early September, asserting that Mobileye's valuation in comparison to other semiconductor companies was "absurd." Citron claimed Mobileye's competitive future was at risk and said that it couldn't remain dominant in advanced driver assistance systems past two years. Our Short-Seller of the Year also named Mobileye as its own "Short of the Year" for 2016, and with shares down 25%, we certainly can see why. ! Of course, little can compare with Citron's short of $72 billion Valeant Pharmaceuticals. Via an incendiary three part report, a special website for detailing drug prices, multiple media appearances and a highly-publicized tweet, Citron questioned whether the drug company was "the Pharmaceutical Enron." Taking on Pershing Square's Bill Ackman, Citron alleged that Valeant's shares had "a better chance of going to $0 than Herbalife." In response, Valeant's shares plummeted from about $200 to Citron's $125 target in just over three weeks, surrendering over $36 billion in market capitalization to date. The short also sparked a legacy of larger questions that continue to echo in the market.! Time after time, Citron demonstrates its ability to move markets. The short-seller in fact claims to have the "most highly predictive track record of any market commentator or columnist on the specific topic of fraudulent and overhyped stocks." A record our database confirms, showing a 14.1% one-year decline, or a 26.6% decline versus the S&P, across 55 campaigns since late 2008. Whether Citron's 2015 shorts will find that that level of downside is yet to be seen, but the short-seller is indisputably skilled in forecasting share price dives, without mentioning the fact that it left Valeant as half the stock it used to be. For this, we name Citron Research as our Short-Seller of the Year.# www.activistshorts.com
January 8, 2016
New and Noteworthy Names
2015 saw the rise of dozens of new short-se!ers. We have highlighted some of the more noteworthy below.
# The Friendly Bear! Launching itself quickly into our top shortsellers, The Friendly Bear published its first short reports on BofI, Freshpet and TrueCar this year. The short-seller also authored an August report on e-commerce company Wayfair, days before Citron Research and Xuhua Zhou.
Founder: Anonymous Founded: March 2015 Average Campaign Return: -44.6% Average Market Cap at Announce: $2.08 billion Number of Campaigns: 4
! Hayman Capital Management! In 2015, Hayman revealed its new Inter Partes Review (IPR) strategy. The IPR petition process allows fast-tracked challenges against patents. According to news reports, Hayman's Kyle Bass also set up a separate vehicle expressly for shorting the fourteen pharmaceutical stocks whose patents he is targeting.
Founder: Kyle Bass Founded: 2005 Average Campaign Return: -14.4% Average Market Cap at Announce: $52.83 billion Number of Campaigns: 14
BlueMountain Capital Management! In January, BlueMountain delivered a notice of default in securities issued by Ocwen aﬃliate Home Loan Servicing Solutions, and the firm said it was short shares of both companies. Later, a short on California Resources thrust BlueMountain into our top short-sellers, with the stock down 79% since June. The firm also unveiled a short on Mattel at Sohn Canada.!
Founders: Andrew Feldstein and Stephen Siderow Founded: 2003 Average Campaign Return: -11.5% Average Market Cap at Announce: $3.04 billion Number of Campaigns: 4
January 8, 2016
More New and Noteworthy Names
Other interesting short-se!ers also made their debuts this year. We're looking forward to more in 2016.!
'15 Frauds, Fads and Failures# Health Technology was the most popular sector in 2015, as short-se!ers anticipated a bursting biotech bubble.
January 8, 2016
Campaigns to Watch!
As you may recall, we have highlighted our favorite activist short ideas in each of our four previous quarterly reports. We started noting the performance in our last quarterly, and this is our second update. ! The returns to a short-seller are extremely impressive, with the average idea down 21.5%, 18.1% more than the S&P 500 over the same time frame. Even among companies above $1 billion at selection, returns are –17% (good for the short-seller), underperforming the S&P 500 by 12%.! The July 2015 quarterly was especially impressive, with the five ideas down an average of 41% in just six months (all five companies had market capitalizations above $1 billion). ! If you’re looking for more short ideas, we’ve of course added five more this quarter. We think these promising companies deserve a second look: ! American Capital (ACAS)! Groupe Casino (CO-FR)! Universal Display (OLED)! Western Union (WU)! and! Proofpoint (PFPT)
January 8, 2016
American Capital, Ltd. Ticker: ACAS Exchange: Nasdaq Short-seller #1: FultonView Research • Announced: 12-9–2015 • Market Cap at Announce:
$3.73 billion • Price at Announce: $14.16 • Return Since Announce: -1.3% Short-seller #2: GeoInvesting • Announced: 12-10-2015 • Market Cap at Announce:
$3.64 billion • Price at Announce: $13.82 • Return Since Announce: 1.1% Market Cap Today: $3.76 billion Price Today: $13.97 Average Daily Trading Volume: $57.8 million
Only about 6% of campaigns in 2015 saw shareholder activism on the long side, but American Capital was one of those rare instances. Opposing perspectives surrounded the company in mid-November, with 8.4% stakeholder Elliott Management openly encouraging American Capital to forego a previously announced spin-oﬀ. In an earlier letter, 2.6% shareholder Orange Capital had also called for repurchases to "build immediate credibility" for the company.! Subsequently, in early December, a new firm called FultonView Research released its debut short report. FultonView said that Orange Capital and Elliott had based their theses on the assumption that American Capital’s reported NAV was a true reflection of the company’s underlying assets. FultonView boldly concluded that their assumption was wrong.! FultonView asserted that American Capital’s portfolio was dramatically inflated and that its management had abused its valuations of the company’s Level 3 assets, or hard to value holdings. Soon after, GeoInvesting, one of our top short-sellers, said that tax documents called into question the true ownership of one of American Capital’s most marked up investments. GeoInvesting also said that a subsidiary paid a "mystery" employee $140 million over three years.!
American Capital hasn’t commented on any of the allegations, but GeoInvesting says the evidence could delay any type of acquisition or strategic alternatives for the company well into 2016, while FultonView thinks it could trigger an SEC investigation. Regardless, we think the company's underlying portfolio deserves a second look, since according to the short-sellers, 68% of its assets are valued by a board that even Elliott concludes has "limited professional investment experience."! Borrow: <1%
! Recent Campaigns: GeoInvesting
January 8, 2016
Casino Guichard Perrachon SA Ticker: CO-FR Exchange: Euronext Short-seller: Muddy Waters Announced: 12-17-2015 Market Cap at Announce: $6.07 billion Market Cap Today:
$4.98 billion Price at Announce: $48.97 Price Today: $40.32 Stock Return Since Announce: -17.7% Average Daily Trading
Muddy Waters' Carson Block, known for targeting accounting fraud in Chinese corporations, not long ago announced that his theme for 2016 is shorting "heavily financially engineered companies." In mid-December, Block got a jump-start on his New Year's resolution with a short position in Groupe Casino, a French mass retailer. ! Keeping in line with Block's added assertion that "European companies are ripe for shorting because of their indebtedness and a lack of scrutiny by investors," Muddy Waters said that Groupe Casino's financial statements were "literally meaningless" when it came to understanding the company's dangerous leverage. The short-seller also alleged that Groupe Casino's financial engineering obfuscated its true issues and that its deleveraging plan simply served to hollow out the company's productive value, essentially to keep its "parasite" parent company, Rallye SA, from collapsing.!
Volume: $55.6 million
Muddy Waters noted that it similarly held a short position in Rallye, aligning with Block's resolution to target the "ticking time bombs" of Western Europe, or what he Borrow: 1-2% sees as the problematic results of interest rates and an environment of "bad companies borrowing." Muddy Waters further explained that Groupe Casino’s deteriorating businesses would not be able to sustain the dividends Rallye would require to service its €2.8 billion net debt. In particular, the short-seller remarked that a recent note from UBS estimated Rallye's value at zero when Groupe Casino trades at €46.! Groupe Casino later responded that its financial structure is solid, but according to Muddy Waters, the company now faces a choice between bad and worse: "Bad" is siphoning cash out of Groupe Casino to pay Rallye interest through value-damaging asset sales, increased leverage in its subsidiaries and dividends at the expense of debt management. "Worse" is ceasing the company's dividends and letting Rallye collapse. For a Groupe Casino and Rallye short-seller, we think either of these outcomes is attractive.!
! Recent Campaigns: Muddy Waters
January 8, 2016
Universal Display Corporation Ticker: OLED Exchange: Nasdaq Short-seller: The Street Sweeper Announced: 12-15-2015 Market Cap at Announce: $2.49 billion Market Cap Today:
$2.42 billion Price at Announce: $53.26 Price Today: $49.61 Short Interest: 11.2% Stock Return Since Announce: -6.9% Average Daily Trading Volume: $32.3 million
Without a doubt, The Street Sweeper had a productive 2015; we've followed over 47 of the short-seller's campaigns this year. Yet despite its plethora of novel ideas, one of our favorites was a 2011 vintage that The Street Sweeper brought back into its crosshairs for a second time this year, an organic light emitting diode (OLED) company called Universal Display.! In 2011, The Street Sweeper criticized Universal Display for discrepancies between the company's actual contract with Samsung versus a press release describing the deal, as well as for its weak patents. Prominent short-seller Asensio & Co. must have taken notice, as it added to the criticism of Universal Display's patent claims via 32 rapid-fire web posts at the end of 2013. The European Patent oﬃce revoked one of the patents shortly after.! Fast forward to the end of 2015, and The Street Sweeper is busy correcting the rumor that Apple will invest in Universal Display's OLED panels. The short-seller said "OLED" is just a generic term for the panel technology, not a misunderstood reference to Universal Display's ticker, "OLED." More unfavorably, The Street Sweeper believes the company's fundamental technology will fall oﬀ a patent cliﬀ in December 2017.!
Will Universal Display's business model also tumble down the cliﬀ with its patents? The Street Sweeper is unequivocally confident, saying it "fully expects" a sudden drop in the company's shares. And The Street Sweeper undoubtedly knows a thing or two about cliﬀs—OLED saw a drop of 47% in the year following its 2011 campaign.! Borrow: <1%
Recent Campaigns: The Street Sweeper
January 8, 2016
Western Union Company Ticker: WU Exchange: NYSE Short-seller: Anonymous Analytics Announced: 10-27-2015 Market Cap at Announce: $10.05 billion Market Cap Today:
$8.67 billion Price at Announce: $19.64 Price Today: $17.05 Short Interest: 14.3%
In October, a short-seller with an aﬃnity for exposing "fraud and corruption" released a condemning report asserting that Western Union had manipulated its EPS numbers. In its allegations, Anonymous Analytics further detailed a number of accounting concerns and a tax "black hole" at the 164-year-old payments company.! In particular, Anonymous questioned four of the company's prior quarterly earnings beats, alleging that the company had directly influenced its own share price through reporting large cost capitalizations in Q1 2012, Q4 2012 and Q4 2013. Anonymous said Western Union's large cost capitalizations also allowed the company to beat its Q2 2015 earnings estimates; however, Anonymous said that if the company capitalized contract costs that were truly consistent with its own historical average, Western Union would have actually missed EPS estimates by 2%. !
Stock Return Since
Adding to its short thesis, Anonymous contended that Western Union's tax minimization strategy and perceived predatory business model could spur a public policy backlash, which is certainly foreboding given the noteworthy impact of the drug Average Daily Trading pricing debate this quarter. But, regardless of whether the company sees any headline Volume: $65.3 million risk for its tax practices, Anonymous believes that the company's mysterious strategies Borrow: <1% suggest either a reliance on tax loopholes or an improbable tax rate near 0% for half of its global remittance activity. In either case, the short-seller notes that Western Union's "deteriorating business model" becomes more and more obsolete by the year.! Announce: -12.4%
Currently, Western Union's shares are down about 12% since Anonymous released its report, so the stock still has room to fall to reach the short-seller's predicted 30% downside. Still, the same short-seller says that based on the company's historical precedent and the fundamentals of its business, an aggressive price cut is close at hand. If that's the case, a negative correction could arrive swiftly.!
Recent Campaigns: Anonymous Analytics
January 8, 2016
Proofpoint, Inc. Ticker: PFPT Exchange: Nasdaq Short-seller: Muddy Waters Announced: 12-3-2015 Market Cap at Announce: $2.95 billion Market Cap Today:
$2.49 billion Price at Announce: $72.92 Price Today: $59.84 Short Interest: 15.3% Stock return since announcement: -17.9% Average Daily Trading Volume: $29.7 million Borrow: <1%
At the Sohn Investment Conference in early December, Muddy Waters said California-based email security company Proofpoint was not just a unicorn, but a "rocket powered unicorn." In its presentation, Muddy Waters colorfully illustrated its unicorn and the company's rocketing over-valuation in the face of increasing net losses. The short-seller darkly concluded that, for Proofpoint, "The skies ahead aren’t so blue."! True to the short-seller's classic style, Muddy Waters' Carson Block also raised questions about Proofpoint's numbers, calling out both the company's fudged organic growth figures and its exaggerated total addressable market for its Targeted Attack Protection oﬀerings. Block said that Proofpoint consistently represented acquisitions as contributing little revenue and mischaracterized itself as part of a higher growth market. ! The short-seller also pointed out that Proofpoint enjoyed touting itself as a "Leader" in Gartner’s “Magic Quadrant," but Block indicated that Gartner actually called for low single-digit growth in Proofpoint's mature market. Block added that decreasing spam and business emails, as well as the migration to cloud email, would likely provide further threats to the company's business. The short-seller particularly criticized Proofpoint's failure to acknowledge the multiple competitive pressure that Muddy Waters said are already eroding its premium pricing. !
Now, Block says Proofpoint is in the midst of a last-gasp eﬀort to grab market share before some doubtlessly formidable opponents move in, including major competitors like Google, Amazon and Cisco. Specifically, the shortseller noted that platforms like Microsoft have a long record of destroying businesses, since "good enough" often wins the day. But Proofpoint's growth rate isn't the only thing at risk, as Block related that the entirety of the cyber security market is coming "back to Earth." With Muddy Waters contending that "the more Proofpoint sells, the more it loses," it may not be long before this unicorn's rocket runs out of fuel. !
! Recent Campaigns: Muddy Waters
January 8, 2016
! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Activist Shorts Research is the first ever activist short-se!er database. If you are not already a subscriber, please email [email protected]
for a $ee 30-day trial. You may share this document via email but may not re-host it or post its contents to any public website. www.activistshorts.com