Depending on whom you talk to, activist short sellers are either an honest counter-balance to free-market greed or lazy manipulators conspiring to make a quick buck.
But for the founders of activist short-selling firm J Capital, in the current market conditions the argument is somewhat irrelevant, with investors more scared of missing out on gains than losing money. “Short selling hasn’t proved profitable in this time of free money. Even bad companies float to the surface and stay there,” Sydney based co-founder of J Capital, Tim Murray, said.
Anne Stevenson-Yang uses her Chinese-language skills to drill down into details about companies listed on US exchanges. Credit: Ben Sklar
J Capital, or J Cap, is one of many activist short-selling firms around the world. Its website clearly warns visitors “we will profit if these stocks decline”, which is more candid than some disclosures from institutional equity analysts.
Companies hate to find themselves the target of a short report and will often call on regulators for protection or launch legal action against those producing them. Ultimately, whether investors should panic sell because of a two-person activist short report is a question of personal judgment and trust.
So, what drives the J Cap team? US-based co-founder Anne Stevenson-Yang says she is primarily motivated by ‘moral outrage’.
“It’s anger at companies that trick retail investors and the losses that are imposed on institutions like the Teachers Pension of Missouri, or the Firemen’s Pension of Tennessee or whatever by individuals who are just promoting their own [interests],” she said.
Anne Stevenson-Yang uses her Chinese-language skills to drill down into details about companies listed on US exchanges. Credit: Ben Sklar
“It’s the safest way to rob a bank! If only I had the gumption to float a totally fake company I would be worth tens or hundreds of millions of dollars. And what am I worth now? Nothing. But that’s money that is stolen from other people, and it really pisses me off”.
The duo met in China, speak Chinese, and mostly focus on Chinese-run companies listed in other countries or companies that have a large presence in China that can be fact-checked against what they are telling investors overseas. They publish reports for free on their website. Recent targets include Nasdaq listed bitcoin miner Bit Digital and ASX-listed lithium play Vulcan Energy.
Until a few years ago, J Cap was domiciled in Hong Kong and its clients included long-only funds. However, the firm re-domiciled in the US when it became clear Hong Kong’s regulators were cracking down on short sellers, especially those critical of mainland Chinese companies. They still have a small China-based team.
Murray recently announced plans to run for Waverley Council in Sydney’s eastern suburbs on a platform of increasing renewable energy. He has not yet decided if he will re-nominate as the Labor candidate for the federal seat of Wentworth in the next federal election. Stevenson-Yang is also politically active, doorknocking on behalf of the Democrats.
J Capital co-founder Tim Murray has taken to Australian politics. He ran as the ALP candidate in the seat of Wentworth in eastern Sydney in the 2018 federal election. He is now turning to council elections. Credit: Peter Rae SMH
Activist short sellers want to be the first to point out a company is over-valued and are motivated by the chance to make money out of a falling stock price. In Australia, J Cap is best known for recent reports on logistics technology firm WiseTech, aerial mapping software provider Nearmap, and its recent critique of lithium play Vulcan Energy. In the past, it has also issued research criticising health supplements business Blackmores, iron ore giant Fortescue and retailer Harvey Norman.
“You have to find something that is just so obviously egregiously... a fraud that everybody can see it. And even those things don’t always work”
J Capital’s Anne Stevenson-Yang
Short sellers borrow stock from long-term investors for a fee and sell the shares into the market. They aim to repurchase the shares later at a lower price and return the shares to the original owner. The short seller hopes to pocket the difference between the higher sale price and lower repurchase price. Not all short sellers are activist – some quietly hold their position and wait.
While activist short sellers have exposed corporate scandals at companies such as collapsed US commodities firm Enron, German payments business Wirecard and ASX listed investment firm BlueSky, the practise remains controversial.
Some firms that engage in the strategy have been accused of conducting ‘short and distort’ raids, making exaggerated claims about companies, sometimes anonymously, and amplifying them via social and traditional media.
This story does not suggest J Cap has engaged in any wrongdoing. But the firm has been hit with its fair share of lawsuits. It was sued by billionaire Thomas Kaplan in the Eastern District of New York for defamation and trade libel over a short report on resources company Novagold. Just last week Vulcan Energy sued J Cap in the Federal Court in Western Australia for misleading or deceptive conduct over a report released in early November alleging Vulcan’s flagship lithium extraction technology is unlikely to succeed.
Murray has done thematic reports over several years, and says, “just as with long investing, short investing a stock may be good in one period and bad in another”. He sees J Cap’s reports more like a transparency health-check.
Stevenson-Yang said equity markets have just “gone vertical ever since 2017” and prices everywhere are over-inflated.
“You have to find something that is just so obviously egregiously a ‘promote’ (pump) or a fraud that everybody can see it. And even those things don’t always work,” she said.
Controversially, Murray says they don’t always contact a company before releasing a report, despite regulatory guidelines to do so. This is because management usually wants to keep issues raised in their reports private, it runs the risk of a pre-emptive injunction or a co-ordinated short squeeze.
The Australian Securities and Investments Commission (ASIC) notes the impact of short reports was being amplified by social media, chat rooms, online groups, and online news. But unlike Hong Kong, it hasn’t chased short sellers out of the country.
On average, the J Cap team publishes one report for every three ideas they investigate.
“Each one will take a team of us three months to work on and so during that three months we are always like “what if somebody else notices?” Stevenson-Yang says.
They get tips from insiders or begin researching a company because of financial anomalies like unusually high margins compared to peers. They scour publicly available financial records then move onto interviewing industry experts.
“You look a little further, poke a little harder. You see if there are some other things that make you wonder. If everything looks normal you just leave it alone. But very often you start poking further and find more,” she said.
”If you have a big stake in a company that is fraudulent, then buyer beware. If you got out in time because of us, good,” Stevenson-Yang says.
In 2019, their curiosity was piqued by WiseTech’s 39 international acquisitions over four years, and they issued a report querying accounting irregularities and revenue. WiseTech shares dropped 21.2 per cent over two days to $28.53. Within a few weeks, another offshore firm, Bucephalus Research, released its own short report arguing WiseTech was inflating organic growth and using contorted accounting.
Shares fell even further in February 2020 when WiseTech lowered its guidance due to the pandemic, hitting $10.48 on 19 March 2020.
But since then, WiseTech shares have risen nearly 420 per cent. The view now is that WiseTech wasn’t fraudulent, but was in the middle of a delicate and complicated multi-year strategy.
Murray said J Cap’s short reports helped WiseTech improve its disclosure.
“Their transparency is much better now. I would say two years after the fact people have more trust in them because it’s clearer what they are doing. I don’t think I was wrong. I think I helped them to clean up their act.”
Morningstar analyst Gareth James drastically changed his target price for WiseTech in the past 18 months from $8.10 to $60. He said a new investor relations team helped him understand the company better.
“We had a valuation on the company which made us the most bearish in the market by a long, long way and that was not because we could see something that was bad, it is because there was not enough information to substantiate the price,” Mr James said.
A spokeswoman for WiseTech said the short reports “were misleading, deceptive and issued during ASX trading hours, which destabilised our share price and allowed J Cap to profit”.
“Now that J Cap’s short thesis on WiseTech has clearly been shown to be wrong, any claim by them that their reports facilitated improved disclosure by WiseTech is untrue and self-serving,” a spokeswoman for WiseTech said.
In the past four weeks, Wall Street’s S&P500 has been racing higher, spooking long-term investors who have lived through bubbles in the 1980s and 2000s.
It might require a significant shift in market sentiment before investors will start to fear losing money again, more than missing out on gains.
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