Viceroy 'got lucky' with sensational Steinhoff report
Hundreds of short-sellers write reports such as these, and they go nowhere, says analyst
Viceroy Research’s reports on companies around the globe show that, with two notable exceptions, it targeted groups that were already the subjects of short-selling, releasing reports just as their shares collapsed.
The US-based short-seller captured the imagination of South Africans with its sensational report about Steinhoff International in December.
This followed Steinhoff CEO Markus Jooste’s resignation and an admission from the retailer that it was investigating accounting irregularities, events that prompted a drop of more than 90% in its market value.
But Viceroy, which is led by former social worker Fraser Perring – and which released its report on Steinhoff two days after shares began declining following a Steinhoff update that its financial results would not be signed off by auditors as they had not finalised their review of criminal and tax issues first raised by German regulators – does not have many admirers.“[Perring] got lucky when his report on Steinhoff coincided with Steinhoff’s collapse, and now everybody thinks that he is a genius,” says Paul Theron, founder of asset manager Vestact.
“Many short-seller reports are written which go nowhere,” he said. “They are ignored because the writer is deemed to be irrelevant, or the short case is nonsense. There are hundreds of short-sellers who write these theses. Especially for companies like Tesla, Shopify, Netflix, Apple ... ”
Theron said shares tend to gain in value over time, with short-sellers getting lucky “every now and then”.The first report archived on Viceroy’s website is on Australian sandalwood processing company Syrah. On December 23 2016, the day Viceroy sounded the alarm about errors in profitability assumptions and Syrah’s unstable management team, investors had already loaned out nearly 26% of the company’s shares for short-selling. The short positions were worth AUS$232-million.
Quintis, also in Australia, saw its short interest swing between 0.3% and 1.14% during the 12 days before Viceroy released its report on sales irregularities at the sandalwood processing company on May 14 2017.Quintis’ shares had already plunged nearly 20% to AUS$0.85 five days before Viceroy said it had bogus sales channels and was booking fictitious sales revenue.
“Every chance they hunt out already shorted shares, and then see if they can build a story around it,” said Simon Brown, founder of investor education platform JustOneLap.
“I would assume – and I may be wrong – that they would look for a strong(ish) story. But [it] is largely subjective. Markets are [about] opinion and ultimately a voting machine on the different opinions.”Brown said Viceroy’s Steinhoff report was strong, but it missed the mark with its first report on Capitec – which received a lot of attention.
“The follow-up Capitec report was stronger,” he said.
In the US, Viceroy hit it big with Caesarstone, where nobody held short positions, on June 14 2017. For a week after Viceroy’s report on the countertop manufacturer the share declined marginally.
It repeated its success with pharmaceuticals company NeuroDerm, which also had not been affected by any apparent bearish sentiment until Viceroy’s August 2017 report warning against Japan’s Mitsubishi Tanabe Pharma’s $1.1bn buyout of the company’s shares. The buyout was announced a month earlier.
Institutions sold 0.67% of NeuroDerm’s shares short the day after this report, raising their bets to 2.3% (or US$23.5-million) two weeks later.
NeuroDerm’s shares, which were steadily rising from a two-year low in December 2016, flatlined after the announcement, and were eventually delisted at $36.65 per share, lower than the $39 Mitshubishi offered shareholders.