HONG KONG (Reuters Breakingviews) - Short-selling is tough, but picking winners may be just as difficult. Andrew Left’s Citron Research, known for negative reports on stocks, is now backing both Chinese electric-car maker Nio and Elon Musk’s Tesla. Conceding the dominance of Musk’s creation and then betting on a rival is a challenging combination.
Citron’s reversal last month, switching to a positive view on Tesla, dismisses arguments mounted in the firm’s earlier screeds – including the threat of a “Tesla killer” competitor. It’s also flattering to Musk’s $58 billion company to compare its Model 3 sales to those of individual models made by the likes of Mercedes and Audi, which offer cars in many more shapes and sizes.
Left’s note this week on the $8 billion Nio, which went public in September, offers food for thought. But it’s more qualitative than quantitative, using the carmaker’s ad campaign and a series of stilted interviews with drivers to talk up the brand’s potential. It fails to address the somewhat problematic hard numbers in the company’s recent third-quarter results, which show a $1.4 billion net loss attributable to ordinary shareholders, as well as several thousand cancelled orders, according to analysts at UBS.
There is room for more than one successful electric-vehicle maker, but in China especially EVs are likely to become a crowded market. And it’s contradictory to argue for Tesla’s pre-eminence and then also support a fairly direct rival. It frames an interesting challenge for Citron, arguably shared by other short-selling specialists.
This year Left’s outfit has issued several perky opinions, championing the likes of smartwatch pioneer FitBit and tobacco-turned-cannabis company Pyxus International. Citron has enjoyed some success as a short seller, according to data released by GMT last year. The question is whether the analysis and tactics that drive down a target company’s share price can readily be recalibrated to trigger a rally when Citron publishes optimistic research. Positive research is a more crowded market, and if there is good news, the chances are a company’s PR machine will get there first.
To be fair to Left, since his endorsement Nio’s shares have climbed 7 percent. Tesla’s are up too. But Pyxus shares have lost two-thirds of their value since Citron’s October report. A short seller U-turn could still make for an uncomfortable ride.
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