Anyone in Investor Relations, Executive Management, or long a company's shares fears a short attack.
When 95% of the world is long, a short attack represents that lone-wolf or social outcast raining on everyone’s parade.
For every short thesis that brings up real issues, there are dozens more that are just opportunistic hit jobs.
The Short Seller’s Equation
The Short Seller's Equation = Extreme Valuation + Lofty Expectations + Something Amiss + Ferris Bueller
An extreme valuation coupled with lofty expectations will set a company up for interest from short sellers. A company lands on a short seller’s radar screen when Management and Investor Relations do their Ferris Bueller impersonation.
The short seller will lock-on to a company once he or she finds something glaringly amiss at the company. Some examples include: the Chairman of the Board Tweeting too much, an executive embellished or misled investors, an overly-aspirational Total Addressable Market (TAM), or even a management that is overconfident and believes it can do no wrong.
The short falls into one of two categories once a short seller finds those things that make him or her go, hmm.
The two primary categories for shorts are:
Structurally Flawed
Everything Else
Those falling into the structurally flawed category are typically an outright fraud, glaring misrepresentations, and companies in terminal decline. Examples include: Enron, Worldcom, and Blockbuster.
Everything else includes earnings misses, bad publicity, a cyclical downturn, et al. The Everything Else category consists of events that are likely reparable in a positive way over the next several quarters.
For the short seller, everything lies in management’s response. Remember, Wall Street represents a game of chicken where the first to throw a temper tantrum loses.
A management team entering a disputation with a short attack loses.
Certainly, a short attack response is a function of what type of attack you face and how legitimate the attack may be from an internal perspective.
The best reaction typically revolves around addressing the short attack organically by naturally responding to the issues and through execution.
