First let me say I have no axe to grind here. I am not short Amira Nature Foods ($ANFI), and we are not paid by the company to write about them. Let's look at the facts: Amira Nature Foods stock price fell 80% in one month, after a short seller put out information accusing them of fraud and cooking the books. The short fund accumulated a massive short position (relative to the float) and concocted a plan that would get attention during conferences and auditor reviews, and it worked – shares imploded, falling 80% in 20 trading days. Now, keep in mind this is a 100-year-old company that sells rice – not a tech start up.
After the dust settles and the company emerges from damage control, guys like me are pouring through the allegations trying to figure out if the stock is fairly valued at the current level. Based on what I see today, this rally of 15% tells us the short sellers are trying to cover as value buyers come in, and also start buying. They are all trying to determine if the quarterly numbers are tracking for the next earnings release. We have now moved away from the fraud allegations – that was a different trade. Now the trade is about the short sellers covering, value buyers accumulating, the fireworks associated with the next quarterly call and some required filings. This is a great story to watch.
This is classic Wall Street, where every dog gets his day, but to me, it never stops being interesting. We are entering an era where guys like Martin Shkreli, who raised AIDS patient medication prices 5000%, are hated, and at some point, I see a day where short sellers will be held accountable for destroying publicly held companies for a profit (and they made plenty here – as much as $10 million) in the name of transparency. You can be that if you attempt something like that, Hillary will be coming after you.
I can also tell you that in my preliminary research (and we will be covering ANFI going forward) something is terribly amiss with the short seller thesis. Having been on the portfolio manager side of the table, the worst case scenario when you have a large short position is when you have a winner start to give back 40 - 60%, and you become your own worst enemy trying to cover. I believe this is what is happening today in the share price. Amira Nature Foods is pretty liquid, trading 600,000 per day, but if one more white knight enters the arena as a value buyer, you can give back all the money you made – that’s a lesson I’ve learned firsthand.
Let’s Talk Stock Price
The first factor to consider is where you think the short seller has an average price for his position, based on VWAP. I think that price is around nine dollars. Based on our internal research, we think value players will buy shares all the way up to nine dollars. In fact, I think these value buyers started yesterday at above four dollars, and were aggressive again today at five dollars. This is very bad for the short selling group who has this core short at nine dollars average – they could wind up losing money on the trade itself, and if that happens, people get fired and investors pull money, because it demonstrates that they are not good at what they do. I can also tell you that the short selling group has already spent the money and counted it as a win…which is another bad idea.
I love these kind of stories – they are great subjects for researchers. Yet, I hate to see companies that recently went public get trashed by greedy money managers. I understand the Jim Chanos of the world are necessary in mega cap stocks to keep the CEO/CFO honest, but the blowback for small cap short seller funds makes the business model suspect in the September 2015 climate. You heard it here first…
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