Counterpoint: Short sellers like us create real value for public markets by telling Canadian investors the truth
By Ben Axler
As public short sellers, we at Spruce Point Capital Management are no strangers to criticism of our bearish research. So it comes as no surprise that an outspoken business commentator has defended Canadian Tire from our critical report and disdains Canadian short-selling practices. The rebukes that we receive from critics like Yvan Allaire force us to maintain high standards in our research, which we release publicly for all market participants to judge. We anticipate such criticism and protect ourselves by ensuring that our analysis is iron-clad.
Accordingly, we wonder which of our claims regarding Canadian Tire Mr. Allaire finds objectionable. Is it that the company is burdening its balance sheet with acquisitions to support decelerating growth? Is it that management is selling assets to support its dividend and buybacks as debt balloons? All of our conclusions are based on publicly available information, reinforced by our extensive background in forensic accounting research. Rather than dismiss our thoughtful 108-page report as “unreadable,” we encourage Mr. Allaire to consider our claims and concerns more carefully. They are genuine. We remain short the stock.
Those who take it upon themselves to uncover and publicize bearish data perform an important service for the under-informed investor community
Market participants appear to agree with us: Canadian Tire stock remains down since we issued our report. Other Canadian companies on which we have published have hit our pessimistic price targets. Maxar Technologies (TSX: MAXR) collapsed from close to $45 to below C$4 per share after we publicized our research. TSO3 (TSX:TOS) traded as low as C$0.30 nine months after we published on the stock at C$2.50.
Long-term share price declines are common among Canadian companies on which we’ve published and are almost always consequences of excessive market optimism and problems which we correctly identify in our reports coming to fruition. Our track record in Canada speaks to the quality of our research. We don’t produce “hatchet jobs” or conduct “heists” to make a “quick profit,” to use Mr. Allaire’s language. We issue deeply researched reports detailing our concerns and take risk-based investment positions on the belief that our analysis is accurate.
Mr. Allaire would have you believe that short-selling reports like ours are cheap, self-interested attacks. On the contrary, they create real value for public markets. Canadian investors are surrounded by a cacophony of Bay Street analysts who have a strong, institutionalized incentive to praise companies they cover with glowing, often inflated, price targets. The research may not always be independent, as brokers and public companies may have lucrative business relationships (e.g. underwriting or advisory arrangements). Indeed, of 12 sell-side analysts rating Canadian Tire, only one has a “Sell.” Why does Mr. Allaire accuse independent short sellers of spreading bias when the research produced by brokers can be far weaker and more skewed? Why are we criticized when we are right, yet the analysts who promoted Maxar and TSO3 are not held accountable when they are wrong?
Institutional investors often manage diversified portfolios of over 100 companies on which they simply cannot conduct deep research individually. Our critical research fills an important niche and serves an important role in keeping markets efficient — particularly on the short side, where such intensive research is relatively scarce.
Academic research has confirmed this time and again. A paper published by the University of Florida in March of this year highlights the value created by “negative activism” in particular, especially when such “activism” takes the form of revelatory fundamental research. Mr. Allaire, a PhD, must understand the importance of short sellers in supporting market efficiency. Negative information simply goes under-reported by the structurally bullish financial industry. Those who take it upon themselves to uncover and publicize bearish data perform an important service for the under-informed investor community.
We agree with Mr. Allaire that institutional investors should challenge our claims if they believe our research is lacking. On Canadian Tire, none has. If they do in fact, disagree with our analysis, they could take advantage of the recent decline in Canadian Tire’s share price as an opportunity to buy. That no investors have responded — and that even Canadian Tire has been reluctant to materially exercise its share repurchase program — speaks volumes to us: the stock is now pricing-in risks which previously went under-appreciated, and management is thinking hard about our capital allocation concerns. Aiding the market in price discovery creates real value. Few market participants do so as effectively as public short sellers like ourselves.
Ben Axler is Chief Investment Officer and founder of Spruce Point Capital Management, an activist short-selling firm.