Three Types of Short Attacks
- stevenrubis
- Feb 2, 2024
- 2 min read
Three Types of Short Attacks
Short attacks represent a value destructive event for a public company.
A public company management team faces significant reputation, career, and compensation risk associated with the short attack. These attacks are destructive for the company given success is defined by a 50% to 90% decline in share price.
Public company management teams are well-served to not only be generally familiar with short attacks, but also the three types of short attacks, and how to defend against such attacks.
Three Types of Short Attacks
Structural Flaw in the Business: The strongest form of short attack. The investment thesis is typically based on an irrefutable premise, and then supported by several data points that highlight the problem associated with that irrefutable premise, in turn exposing some form of nefarious behavior by management. Examples are accounting issues or running your clinical trials outside the United States.
How to Defend: Develop a long-term plan that changes the irrefutable premise through action and execution over several quarters and years. You have to “show” your way out over time.
Narrative Driven: A weak form of short attack because the investment thesis is predicated upon subjective data. The investor may not like the business model, or how you present the business model. The majority of objections will likely be defended by simple business judgment on the part of management.
How to Defend: Utilize a well-developed investor deck and buttoned up earnings materials, as well as 1x1 meetings.
Example: Adtalem Global Education
Earnings Performance Driven: Another weak short attack because it is likely short-term in nature. Ultimately, management teams get tripped up by these types of attacks. The key to remember is that unless you are a tactical hedge fund, no one likely cares. One quarter miss out of a lengthy track record of meet, beat, and raising, significantly lessens the negative impact. A strong reputation and strong track record likely gets the stock back to even after just six months.
How to Defend: Better refined financial guidance and financial expectation management. The better the reputation and track record of management, the quicker the recovery from this type of attack.
Example: Cerner
When a company exhibits a track record of meeting and beating for 60 straight quarters, investors will give the company a pass if they start to miss a quarter or two.
Short attacks have a lot to do with reputation and track record, the worse management is on both fronts, the higher the likelihood a short attack will come their way!
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