Short attacks have the potential to do significant and long-term damage to a public company’s valuation. Unlike the typical investor, a short seller seeks to gain from the decline in a company’s stock price. While there is little you can do to completely protect your shares from such an attack, there are several things you can do to be prepared for one and to mitigate the potential for long-term damage.
A short attack can appear in the form of an unexpected publication of a research report or press release that touts rationale for a bear investment case in your stock, or a post of a salacious rumor in an online forum such as Seeking Alpha or Motley Fool, or simply an escalating short sale position by anonymous investors over a period of time. It can be a scramble to identify what is behind the attack; for example, what’s being said about your company, the macro sector, the competition, or the customer? Is there truth to it or is it merely a manipulative ploy by one short seller with an agenda? Currently, there is no regulation in place that requires investors to disclose short positions, which makes it more difficult for companies and the market to track the existence of short sellers and monitor their activity.
Planning Ahead for a Short Attack
Because the nature of a short attack can rely on catching a company off-guard, we counsel our clients to have a communications policy in place that includes several important components: who are the approved company spokespeople, what is the policy on responding to rumors (we don’t), and what’s the plan in the event of a crisis? A short attack certainly falls in this latter category. A short investor seeks to identify holes in the confidence of a long investment thesis. As a result, the issuer naturally feels compelled to “do something” and fire off a response to rumors or other unsubstantiated “facts” that may be publicly circulating. Unfortunately, often the mere acknowledgement by a company representative can bring heightened or unwanted attention to the commentary or lend some degree of validation, particularly in a volatile market or when a stock has been subject to some recent upward momentum.
There are a number of strategies for addressing a short attack, and choosing the right option will likely depend on the nature of the attack. The most important thing we recommend is to refrain from immediately responding. Yes, it’s infuriating, but we recommend:
- taking the time to identify the source and any available components of the short thesis;
- determining if there is any truth to the content and where there is misrepresentation or misinformation of the facts presented;
- deciding if a response is merited; and finally
- developing a communications plan accordingly.
Here are some things to consider when building your plan:
Do nothing. Some issuers may ultimately determine that the best course of action is to draw no additional attention to the situation, particularly if the attack lacks credibility and the short thesis can be readily dismissed by near-term company performance.
Offer a prepared public response. If you decide that this is the best course of action, prepare comments that specifically address or invalidate the short seller’s allegations. It’s important that any commentary be strictly factual and based on verifiable data for backup. Prepare your response so it does not come across as defensive.
Reach out to your covering analysts. Chances are, if you are subject to a short attack, your analysts are hearing about it. A call or email to offer to discuss the situation and any questions they may have can go a long way in ensuring they are up-to-date on your story and prepared to respond to any inquiries.
Monitor trading activity. In a post last year, we identified several ways to monitor short selling in your shares. This can help identify if there is a growing message or thesis in the market that you need to address.
Maintain consistent dialogue with your analysts and investors. They may hear of activity before it is known to a wider audience, thus providing you with additional time to prepare. While your analysts and investors may not specifically signal their long/short thesis, consistently delivering YOUR rationale for should take priority in all communication.
Try to identify the source of short selling. This can be simple if a report or press release has been issued by one individual. Other times, it may be common sentiment among one or more hedge funds.
Select an appropriate channel for delivering your response. It isn’t always necessary to provide a specific response to a short seller’s thesis. Consider some “higher road” options, such as specifically addressing the accusations on your next conference call, without sounding defensive. Messages in press releases can also drive home points that highlight a long investment thesis.
One final note on short selling, which may provide a small bit of comfort if your shares come under attack. In 2010, the SEC implemented a “safety net” to halt a sudden short attack. In short, Rule 201 places certain restrictions on short selling when a stock is experiencing significant downward price pressure. The measure is intended to promote market stability and preserve investor confidence. Rule 201 includes the following features:
- Short Sale-Related Circuit Breaker: The circuit breaker would be triggered for a security any day in which the price declines by 10 percent or more from the prior day’s closing price.
- Duration of Price Test Restriction: Once the circuit breaker has been triggered, the alternative uptick rule would apply to short sale orders in that security for the remainder of the day as well as the following day.
Taking the time now to prepare for a short attack will save you added stress if your shares ever do come under attack. No matter how dire the situation seems, there are a lot of steps you can take to handle a short attack professionally and with little damage.
Our team at Gilmartin helps companies strategize their game plan for navigating these types of situations. If you have any questions or would like to talk to one of our analysts about building your game plan for short attacks, contact us today.
Leigh Salvo, Managing Director