Short Sellers Like Citron Aren’t the Enemy of Investors


I’ve never looked at a Reddit thread in my life, so I have no idea whether the WallStreetBets crowd is enjoying the news that Citron Research will no longer publish its short-selling reports after 20 years in the business. But assuming they are, they’re fools.

One of the truly mystifying things about the whole GameStop Corp. stock craziness is the way short sellers have become the enemy. One part of the frenzy appears to be anger with Wall Street elites because they all got off the hook after the 2008 financial crisis. But short sellers had nothing to do with the crisis.

The short interest in GameStop, AMC Entertainment Holdings Inc., Bed Bath and Beyond Inc. and other stocks that have catapulted upward thanks to the Reddit day traders has been enormous. But these short plays were hardly an effort to destroy these companies. They were based on fundamental reports by research shops like, well, Citron.

Are the Reddit day traders ganging up on short sellers because one of their heroes, Elon Musk, has been so contemptuous of them over the years? Or is it because they think, as so many people do, that it’s un-American to bet against a company? Or it is simply that the stocks of these companies, with their small floats and their big short interest, are relatively easy to squeeze if enough day traders buy them all at once? Whatever the case, it’s just dumb. Shorts aren’t the enemy of individual investors. Shorts can often be their best friend.

Old-timers like me have seen, again and again, the positive influence short sellers can bring to the market. First, in making the bear case for various stocks, short sellers offer bullish investors valuable information; good investors will factor bearish reasoning into their own thinking, even if they stay on the long side. Academic research has consistently shown that short selling helps improve price discovery. And, of course, short sellers often do the job the Securities and Exchange Commission is supposed to be doing in rooting out fraud.

The most famous such case in modern times was Jim Chanos smoking out the Enron fraud when, in the eyes of most investors, the company could do no wrong. But there are plenty of other examples. Carson Block — aka Muddy Waters — made his bones shorting a Chinese company, Sino-Forest Corp., which was awash in fraud. Citron exposed the fraud at Valeant Pharmaceuticals in the fall of 2015, when it released a report describing the stock as “toxic” and predicting the company would have difficulty meeting its debt payments. Long investors who paid attention to that report saved a lot of money.

I couldn’t find a GameStop report on Citron’s website, but on Jan. 21, the firm’s founder, Andrew Left, went on a YouTube show called ZingerNation Power Hour — yeah, that’s really what it’s called — to make the case against the company. “There is a high short interest for a reason,” he said, “because pretty much their business is in terminal decline. But nobody wants to hear that.” He added that the company was seeing insider selling, plus it carried more than $1 billion in debt. And so on.

In a short video Left posted on Friday morning announcing that Citron would no longer generate short-selling ideas, he said that last year his long recommendations gained, on average, 121% — and that is where he would now put his focus. You can’t blame him, I suppose. By the time he covered his GameStop short, his position was down 100%. And it’s clear that life is not going to get easier for short sellers anytime soon.

But if other short sellers follow his example, it will wind up being far more disastrous for the markets than a bunch of day traders losing money because they unwisely believed they could force their “meme stocks” up forever. Like many short sellers, Dan David of Wolfpack Research was struck by the fact that both Senator Ted Cruz and Representative Alexandria Ocasio-Cortez, who agree on nothing, both tweeted their support for the WallStreetBets day traders. Senator Elizabeth Warren has demanded an investigation, and it seems likely that the SEC will get involved.

“I think they’re going to use this as an excuse to say that you can’t publicly talk about your shorts,” said David, who usually issues detailed reports when he does short-selling research. “Which means that we’ll all be going back to counting investment banking analysts.” At that, he let out a sardonic laugh.

Are there short-selling practices that should be curtailed? There are, starting with what’s called “short-and-distort” schemes, in which short sellers try to spread lies about the companies they’re shorting to push the stock down. You see this mostly on Twitter, though the irony is that most of the people who use that disreputable tactic tend to have more in common with the Reddit day traders than the Wall Street hedge funds the WallStreetBets crowd is trying to punish.

When you come right down to it, throwing your money at certain stocks purely because you’re hoping to harm short sellers is a ridiculous reason to invest. Except that if they succeed, they will have harmed not just the short sellers but the rest of the investing public as well.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast "The Shrink Next Door."

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