Be Wary Of Companies Who Launch Anti Short-Selling Campaigns

From time to time you will find companies who will issue press releases, imploring their shareholders to "take a stand" against unsavory short-sellers. They will threaten lawsuits against these un-named "rogue" traders and also ask their shareholders to either request physical delivery of their shares in certificate form or request that their brokers not lend their shares out to other firms. This will serve to decrease the "electronic" free-trading float and thus put a "squeeze" on "illegal" short-selling activity.

This is all fine and good. Companies can do whatever they want - it's their company, and if they want to rally their shareholders against the "dark side", then that's fine.

However, you need to be especially wary of companies that embark on these campaigns.

From my experience (10+ years worth), companies who launch these campaigns are usually trying to distract people from a much greater problem - an eroding and under-performing business.

They will go to great lengths to point out how their stock has fallen since the "illegal" short-sellers entered the stock, usually obscuring the fact that their company has some other major issues. The simple fact of the matter is that if a company is doing well and consistently outperforming shareholder expectations then short-sellers will steer clear of the company. Short-sellers (no matter what you may think) are generally speaking a more sophisticated trader - they are (usually) not dumb enough to put on a sizable short position in a stock that is trending higher. If they really want to make life miserable for a company then they will pick on a company which has some major problems. It just makes their job easier.

You have to question why some companies devote so much time to these anti short-selling campaigns. Do they really think that their business will soar once these so-called "rogue" traders are out of the picture? Or are they simply using short-sellers are a scapegoat, seeking to distract their shareholders from a much-murkier bigger picture?

The simple fact of the matter is that well-run and successful companies don't lose any sleep over short-sellers. As the saying goes, "Water seeks its own level". The stock market WILL properly value a company over time, regardless of how many short-sellers are "illegally" shorting the stock. Short-sellers will abandon their positions if the company outperforms over time.

If the CEO of your favorite company lashes out against short-sellers and seems to be devoting quite a bit of time to hunting them down then you might have a problem. If you find yourself holding such a stock then please do yourself a favor - re-evaluate your position and ask yourself the hard questions. Do I still want to hold this stock even though I might have a loss right now? Is the company's business improving or floundering? Is my money better off somewhere else?

Some companies have legitimate gripes, but many are simply seeking to distract. If a company seems to have it out for short-sellers then you need to re-visit your reasons for buying in the first place and see if they still hold true.

Filed under: Stock Market Education | General Knowledge