Capital Markets / Investor Relations in Two Minutes or Less
What the Adtalem $AGTE Short Attack Teaches Public Company Executives
On Tuesday, January 30, the company Adtalem Global Education became the target of a short attack by investment firm Safket Capital.
The short attack is instructive because it illustrates a low-quality short attack.
While I may not be a fan of for-profit education stocks, I disagree with the short report, and believe it violates significant short attack rules.
Short Attack Rule 1: Do Not Manipulate the Stock or Business
A good short seller knows that the fundamental structural flaw underpinning the investment thesis is enough to topple the stock price. A strong short thesis may take time to resolve itself, but it never needs help from the short seller to actually succeed.
Safket’s short report violates some primary short selling rules for me:
Comments During CNBC Interview Represent Manipulation: Making comments that any negative publicity will have a negative impact on company enrollments is the investor attempting to control the investment outcome.
Investment Thesis is Convoluted and Already Widely Known: Much of the investment thesis is based on the for-profit education short trade from 10 years ago, and seems highly subjective, or narrative based that can be explained away by simple business judgement, rather than a true structural flaw with the business.
What is the hallmark of a best-in-class short attack versus noise?
A best-in-class short report is based on a hard to refute, fundamental, and simple structural flaw of the underlying business.
Example: Steve Rubis Biotech ran its clinical trials in Russia.
Well-heeled biotech investors know that running clinical trials ex-US represents a near 100% rejection rate from the FDA.
A simple, fundamental, structural flaw of the underlying business underpins the short attack that does not need to be manipulated to be true.
Several supporting ideas are then discussed that support or highlight the primary structural flaw.
If the short seller starts making ad hominem attacks or making statements that seemingly manipulate company performance to impact the stock price, such work is very simply a hit piece.
Real Life Case Study: Cano Health
Two primary reasons you could tell there was a really strong short thesis associated with this company
Accounting Issues: There were two primary accounting issues. Adjusted EBITDA add-backs were not flowing through the Income Statement. Second, certain Adjusted EBITDA adjustments were inflating Adjusted EBITDA
Cult of the CEO: Shorts always look for a charismatic leader or cult of personality as a hallmark of something being amiss at the underlying business.
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