2015 Short-Seller of the Year

January 8, 2016
Activist Shorts Research
A look back on the best ca!s of 2015 and campaigns to watch in 2016!
Activist shorts had another big year.!
Short campaigns saw an average campaignlength return to the company of about -20
percent. We also saw the debut of dozens
of new activist short-sellers. !
Among the flurry of shorts, we would like
to highlight some of the best calls of the
year.!
2016 Winter
Quarterly
Report
!
We bring you our:!
2015 Fraud Call of the Year,!
2015 Non-Fraud Call of the Year,!
2015 Short-Seller of the Year,!
A review of new and noteworthy short-sellers,!
and!
Five new campaigns to watch closely in 2016!
!
!
www.activistshorts.com
1
January 8, 2016
2015 Fraud Call of the Year:
Tianhe Chemicals Group Ltd
Anonymous Analytics
Ticker: 1619-HK
In our Summer Quarterly, we discussed the challenges of anonymity with
short-seller and self-styled righter of corporate wrongs Anonymous Analytics.
Anonymous remarked that it attempted to overcome these hurdles by
producing superior and high quality work that stands on its own. We certainly
think Anonymous has achieved its goal.!
Exchange: Hong Kong
Announced: 9-2-2014
Market Cap at Announce: $7.61 billion
Market Cap Today: $3.74 billion
Price at Announce: $2.43
Price Today: Halted
Return since announcement: -51.9%
Focused mostly on fraud and Chinese corporations, the short-seller has issued
lengthy reports on eight companies so far. One of these companies, a $7.6
billion Chinese chemical manufacturer called Tianhe Chemicals, was the
subject of a 67-page report detailing its financial "alchemy" late last year. !
In its report, Anonymous said Tianhe was "a massive fraud and one of the
largest stock market scams ever conceived." Asserting that Tianhe generated
only a fraction of its reported profits, the short-seller alleged that its revenue
was 85% overstated, that its net income was 100% fabricated and that Tianhe
had even gone so far as to create two sets of books for different auditors.!
Although it might be said that Anonymous' September 2014 fraud allegations predate our scope here, even the most
successful short-sellers can spend days or years waiting for vindication, and Tianhe would demonstrate this truth as
its protracted struggle continued throughout 2015. At one point, Tianhe would even accuse Anonymous of
fabricating the very financial documents in its short report, including forging its chairman's signature. !
Even more, Morgan Stanley rallied in support of the company, stating that it was "resolutely behind Tianhe's world
class management team." According to Reuters, the bank's Private Equity Asia unit spent more than $2 million on
third-party diligence work prior to its 2012 acquisition of a minority stake in Tianhe. Its 8.9% position represented
the private equity firm's largest equity investment in Asia, and the bank was a third sponsor of Tianhe's listing.!
However, Anonymous persevered, issuing multiple responses to Tianhe's numerous rebuttals and writing an open
letter to the company's auditor. The Associated Press also followed up with a report detailing its own two-month
investigation into Tianhe, which confirmed many of Anonymous' claims. Then, in early 2015, the company curiously
halted its shares a second time. Tianhe has not resumed trading since. On top of that, Deloitte ominously resigned
as its auditor this past September.!
Indeed, Tianhe has frittered away over half of its life as a public company with its shares halted. We're certainly
impressed, as Anonymous' assertions represent the most sizable major business fraud allegations we've ever
followed. In fact, at the time of the first allegations, Tianhe's market capitalization was 1.6x larger than that of SinoForest, the infamous forestry company that brought Muddy Waters into the limelight in 2011. For this, we award
Anonymous Analytics our 2015 Fraud Call of the Year.!
www.activistshorts.com
2
January 8, 2016
2015 Non-Fraud Call of the Year:
Cheniere Energy, Inc.
Kynikos Associates
Ticker: LNG
Exchange: NYSE MKT
Announced: 9-9-2015
Market Cap at Announce: $13.4 billion
Market Cap Today: $8.75 billion
"A looming disaster" is what Kynikos Associates' Jim Chanos called the
liquefied natural gas (LNG) space in a September interview, noting that he had
been negative on the industry for six months. Chanos said LNG was viewed as
a savior for natural gas, as a way to fill an incredible energy demand in Asia. But
he said the problem was that "everybody figured this out...at the same time."!
The result, according to Chanos, was a massive buildout of excess capacity,
which he said would increase as much as 80% in six years. Yet, he said LNG
demand was no longer growing, while debt-laden plants flooded the market.
With that, Chanos unveiled his short on Cheniere Energy, a LNG developer
with plans to become the first exporter from the lower United States.!
Over the next few months, Chanos elaborated further, noting that investors
saw Cheniere's 20-year "take-or-pay" contracts as safe. Yet, the short-seller said
Price Today: $34.97
the contracts only covered 87% of the company's commissioned capacity and
represented less than half of its "dream" $4.1 billion EBITDA. He added that
Return since announcement: -38.4%
Qatar's willingness to renegotiate similar agreements called into question the
sacrosanctity of "take-or-pay" in a declining commodity environment. Chanos also related that the remaining 13% of
capacity was uncontracted and would struggle to break-even. As a result, he said the company would have to depend
on the disarrayed spot market, but he noted that Cheniere's margin assumptions implied a premium to spot prices. !
Price at Announce: $56.75
In sum, Chanos said Cheniere's reality was an annual EBITDA of $1.7 billion generated by contracted volumes, with
difficulties in finding buyers that would commit to long-term contracts and an average utilization rate for its
liquefaction terminals of only 88%. The short-seller added that even if all of its contracts were honored, Cheniere
would still face a $30 billion debt burden from its build-out. Chanos, our harbinger of Enron, thus concluded that
after subtracting $1 billion in depreciation for equipment located in Louisiana swamps and $2 billion in annual
interest, returns to shareholders would be de minimus.!
Not everyone agreed. In particular, Cheniere was one of Carl Icahn's activist targets. Icahn disclosed an 8.2% stake
in August, took two board seats and announced plans to discuss “operations, capital expenditures, financings and
executive compensation.” Icahn, along with Cheniere's board, would later oust Cheniere's co-founder, chairman,
president and CEO Charif Souki, who also happened to be the highest-paid CEO in corporate America in 2013.!
But Icahn's involvement didn't stop Cheniere's tumble. In fact, shares have plummeted 37% since Chanos'
September interview. Yet, Chanos has been bearish on LNG even longer, at least as far back as Cheniere's highs
earlier in 2015. The Wall Street Journal also recently remarked on natural gas, saying, "It’s odorless, invisible and very,
very dangerous for energy investors." That certainly appears to be the case for Cheniere—Chanos' so-called "great
white elephant" has shaved almost $5 billion off its $13.4 billion market capitalization, while the short-seller remains
undeterred by smart shareholders. For this, we award Kynikos Associates our 2015 Non-Fraud Call of the Year.!
www.activistshorts.com
3
January 8, 2016
2015 Short-Seller of the Year:
Citron Research#
Founded by Andrew Left, Citron Research has one of the longest published records
as a short-seller, with a chronicle of frauds and terminal business models stretching
back to 2001. Adding to Citron's 14-year track record of successes, 2015 was a
banner year for the short-seller, packed full of that for which it is best known: lively
short reports and market-toppling tweets. !
Founder: Andrew Left
Founded: 2001
Average Target Company
Return: -15%
Starting off its memorable year, Citron asserted in late 2014 that GoPro's share
price would fall from around $84 to $30 within 12 months. Yet, Citron suspected
that GoPro would be fortunate to maintain even that price, as the short-seller
predicted that the consumer electronics corporation could not become the media
company Wall Street had envisioned. After an early run-up in the beginning of 2015,
the stock reached Citron's target a month ahead of schedule, breaking $30 in late
September. GoPro continued to tumble below its IPO price through November.!
Number of Campaigns: 55
tracked since 8-12-2008
Near GoPro's peak in mid-summer, Citron expanded its allegations with a short on
Ambarella. Citron asserted that the $4 billion video chip maker rode GoPro's
coattails up to its oversized enterprise value, a valuation that Citron said exploded
faster than Uber's. But, Citron warned that Ambarella soon faced commoditization and a declining technological
edge. As the short behind Plug Power, our 2014 Valuation Call of the Year, Citron certainly knows bubbles, but this
bubble burst even faster than expected—in just six months, Ambarella has already fallen past Citron's 12-month
target of $60.!
Citron called a second bubble in early September, asserting that Mobileye's valuation in comparison to other
semiconductor companies was "absurd." Citron claimed Mobileye's competitive future was at risk and said that it
couldn't remain dominant in advanced driver assistance systems past two years. Our Short-Seller of the Year also
named Mobileye as its own "Short of the Year" for 2016, and with shares down 25%, we certainly can see why. !
Of course, little can compare with Citron's short of $72 billion Valeant Pharmaceuticals. Via an incendiary three part
report, a special website for detailing drug prices, multiple media appearances and a highly-publicized tweet, Citron
questioned whether the drug company was "the Pharmaceutical Enron." Taking on Pershing Square's Bill Ackman,
Citron alleged that Valeant's shares had "a better chance of going to $0 than Herbalife." In response, Valeant's shares
plummeted from about $200 to Citron's $125 target in just over three weeks, surrendering over $36 billion in market
capitalization to date. The short also sparked a legacy of larger questions that continue to echo in the market.!
Time after time, Citron demonstrates its ability to move markets. The short-seller in fact claims to have the "most
highly predictive track record of any market commentator or columnist on the specific topic of fraudulent and overhyped stocks." A record our database confirms, showing a 14.1% one-year decline, or a 26.6% decline versus the S&P,
across 55 campaigns since late 2008. Whether Citron's 2015 shorts will find that that level of downside is yet to be
seen, but the short-seller is indisputably skilled in forecasting share price dives, without mentioning the fact that it
left Valeant as half the stock it used to be. For this, we name Citron Research as our Short-Seller of the Year.#
www.activistshorts.com
4
January 8, 2016
New and Noteworthy Names
2015 saw the rise of dozens of new short-se!ers. We have highlighted some of the more noteworthy below.
#
The Friendly Bear!
Launching itself quickly into our top shortsellers, The Friendly Bear published its first
short reports on BofI, Freshpet and TrueCar
this year. The short-seller also authored an
August report on e-commerce company
Wayfair, days before Citron Research and
Xuhua Zhou.
Founder: Anonymous
Founded: March 2015
Average Campaign Return: -44.6%
Average Market Cap at Announce:
$2.08 billion
Number of Campaigns: 4
!
Hayman Capital Management!
In 2015, Hayman revealed its new Inter Partes
Review (IPR) strategy. The IPR petition
process allows fast-tracked challenges against
patents. According to news reports, Hayman's
Kyle Bass also set up a separate vehicle
expressly for shorting the fourteen
pharmaceutical stocks whose patents he is
targeting.
!
Founder: Kyle Bass
Founded: 2005
Average Campaign Return: -14.4%
Average Market Cap at Announce:
$52.83 billion
Number of Campaigns: 14
BlueMountain Capital Management!
In January, BlueMountain delivered a notice of
default in securities issued by Ocwen affiliate
Home Loan Servicing Solutions, and the firm
said it was short shares of both companies.
Later, a short on California Resources thrust
BlueMountain into our top short-sellers, with
the stock down 79% since June. The firm also
unveiled a short on Mattel at Sohn Canada.!
!
www.activistshorts.com
Founders: Andrew Feldstein and
Stephen Siderow
Founded: 2003
Average Campaign Return: -11.5%
Average Market Cap at Announce:
$3.04 billion
Number of Campaigns: 4
5
January 8, 2016
More New and Noteworthy Names
Other interesting short-se!ers also made their debuts this year. We're looking forward to more in 2016.!
!
'15 Frauds, Fads and Failures#
Health Technology was the most popular sector
in 2015, as short-se!ers anticipated a bursting
biotech bubble.
www.activistshorts.com
6
January 8, 2016
!
Campaigns to Watch!
As you may recall, we have highlighted our
favorite activist short ideas in each of our
four previous quarterly reports. We started
noting the performance in our last quarterly,
and this is our second update. !
The returns to a short-seller are extremely
impressive, with the average idea down
21.5%, 18.1% more than the S&P 500 over
the same time frame. Even among
companies above $1 billion at selection,
returns are –17% (good for the short-seller),
underperforming the S&P 500 by 12%.!
The July 2015 quarterly was especially
impressive, with the five ideas down an
average of 41% in just six months (all five
companies had market capitalizations above
$1 billion). !
If you’re looking for more short ideas, we’ve
of course added five more this quarter. We
think these promising companies deserve a
second look: !
American Capital (ACAS)!
Groupe Casino (CO-FR)!
Universal Display (OLED)!
Western Union (WU)!
and!
Proofpoint (PFPT)
!
www.activistshorts.com
!
7
January 8, 2016
American Capital, Ltd.
Ticker: ACAS
Exchange: Nasdaq
Short-seller #1: FultonView Research
• Announced: 12-9–2015
• Market Cap at Announce: $3.73 billion
• Price at Announce: $14.16
• Return Since Announce: -1.3%
Short-seller #2: GeoInvesting
• Announced: 12-10-2015
• Market Cap at Announce: $3.64 billion
• Price at Announce: $13.82
• Return Since Announce: 1.1%
Market Cap Today: $3.76 billion
Price Today: $13.97
Average Daily Trading Volume:
$57.8 million
Only about 6% of campaigns in
2015 saw shareholder activism on
the long side, but American Capital
was one of those rare instances.
Opposing perspectives surrounded
the company in mid-November,
with 8.4% stakeholder Elliott
Management openly encouraging American Capital to forego a previously
announced spin-off. In an earlier letter, 2.6% shareholder Orange Capital had
also called for repurchases to "build immediate credibility" for the company.!
Subsequently, in early December, a new firm called FultonView Research
released its debut short report. FultonView said that Orange Capital and
Elliott had based their theses on the assumption that American Capital’s
reported NAV was a true reflection of the company’s underlying assets.
FultonView boldly concluded that their assumption was wrong.!
FultonView asserted that American Capital’s portfolio was dramatically
inflated and that its management had abused its valuations of the company’s
Level 3 assets, or hard to value holdings. Soon after, GeoInvesting, one of our
top short-sellers, said that tax documents called into question the true
ownership of one of American Capital’s most marked up investments.
GeoInvesting also said that a subsidiary paid a "mystery" employee $140
million over three years.!
American Capital hasn’t commented on any of the allegations, but
GeoInvesting says the evidence could delay any type of acquisition or strategic
alternatives for the company well into 2016, while FultonView thinks it could trigger an SEC investigation.
Regardless, we think the company's underlying portfolio deserves a second look, since according to the short-sellers,
68% of its assets are valued by a board that even Elliott concludes has "limited professional investment experience."!
Borrow: <1%
!
Recent Campaigns: GeoInvesting
www.activistshorts.com
8
January 8, 2016
Casino Guichard Perrachon SA
Ticker: CO-FR
Exchange: Euronext
Short-seller: Muddy Waters
Announced: 12-17-2015
Market Cap at Announce:
$6.07 billion
Market Cap Today: $4.98 billion
Price at Announce: $48.97
Price Today: $40.32
Stock Return Since
Announce: -17.7%
Average Daily Trading
Muddy Waters' Carson Block, known for
targeting accounting fraud in Chinese
corporations, not long ago announced
that his theme for 2016 is shorting
"heavily financially engineered
companies." In mid-December, Block
got a jump-start on his New Year's
resolution with a short position in Groupe Casino, a
French mass retailer. !
Keeping in line with Block's added assertion that "European companies are ripe for
shorting because of their indebtedness and a lack of scrutiny by investors," Muddy
Waters said that Groupe Casino's financial statements were "literally meaningless" when
it came to understanding the company's dangerous leverage. The short-seller also alleged
that Groupe Casino's financial engineering obfuscated its true issues and that its
deleveraging plan simply served to hollow out the company's productive value,
essentially to keep its "parasite" parent company, Rallye SA, from collapsing.!
Volume: $55.6 million
Muddy Waters noted that it similarly held a short position in Rallye, aligning with
Block's resolution to target the "ticking time bombs" of Western Europe, or what he
Borrow: 1-2%
sees as the problematic results of interest rates and an environment of "bad companies
borrowing." Muddy Waters further explained that Groupe Casino’s deteriorating businesses would not be able to
sustain the dividends Rallye would require to service its €2.8 billion net debt. In particular, the short-seller
remarked that a recent note from UBS estimated Rallye's value at zero when Groupe Casino trades at €46.!
Groupe Casino later responded that its financial structure is solid, but according to Muddy Waters, the company
now faces a choice between bad and worse: "Bad" is siphoning cash out of Groupe Casino to pay Rallye interest
through value-damaging asset sales, increased leverage in its subsidiaries and dividends at the expense of debt
management. "Worse" is ceasing the company's dividends and letting Rallye collapse. For a Groupe Casino and
Rallye short-seller, we think either of these outcomes is attractive.!
!
Recent Campaigns: Muddy Waters
www.activistshorts.com
9
January 8, 2016
Universal Display Corporation
Ticker: OLED
Exchange: Nasdaq
Short-seller: The Street
Sweeper
Announced: 12-15-2015
Market Cap at Announce:
$2.49 billion
Market Cap Today: $2.42 billion
Price at Announce: $53.26
Price Today: $49.61
Short Interest: 11.2%
Stock Return Since
Announce: -6.9%
Average Daily Trading
Volume: $32.3 million
Without a doubt, The Street Sweeper
had a productive 2015; we've followed
over 47 of the short-seller's
campaigns this year. Yet despite its
plethora of novel ideas, one of our
favorites was a 2011 vintage that The
Street Sweeper brought back into its crosshairs for a second time this year, an organic
light emitting diode (OLED) company called Universal Display.!
In 2011, The Street Sweeper criticized Universal Display for discrepancies between the
company's actual contract with Samsung versus a press release describing the deal, as
well as for its weak patents. Prominent short-seller Asensio & Co. must have taken
notice, as it added to the criticism of Universal Display's patent claims via 32 rapid-fire
web posts at the end of 2013. The European Patent office revoked one of the patents
shortly after.!
Fast forward to the end of 2015, and The Street Sweeper is busy correcting the rumor
that Apple will invest in Universal Display's OLED panels. The short-seller said
"OLED" is just a generic term for the panel technology, not a misunderstood reference
to Universal Display's ticker, "OLED." More unfavorably, The Street Sweeper believes
the company's fundamental technology will fall off a patent cliff in December 2017.!
Will Universal Display's business model also tumble down the cliff with its patents?
The Street Sweeper is unequivocally confident, saying it "fully expects" a sudden drop
in the company's shares. And The Street Sweeper undoubtedly knows a thing or two about cliffs—OLED saw a drop
of 47% in the year following its 2011 campaign.!
Borrow: <1%
Recent Campaigns: The Street Sweeper
www.activistshorts.com
10
January 8, 2016
Western Union Company
Ticker: WU
Exchange: NYSE
Short-seller: Anonymous
Analytics
Announced: 10-27-2015
Market Cap at Announce:
$10.05 billion
Market Cap Today:
$8.67 billion
Price at Announce: $19.64
Price Today: $17.05
Short Interest: 14.3%
In October, a short-seller with an affinity for
exposing "fraud and corruption" released a
condemning report asserting that Western Union
had manipulated its EPS numbers. In its
allegations, Anonymous Analytics further detailed
a number of accounting concerns and a tax "black
hole" at the 164-year-old payments company.!
In particular, Anonymous questioned four of the
company's prior quarterly earnings beats, alleging
that the company had directly influenced its own share price through reporting large
cost capitalizations in Q1 2012, Q4 2012 and Q4 2013. Anonymous said Western
Union's large cost capitalizations also allowed the company to beat its Q2 2015 earnings
estimates; however, Anonymous said that if the company capitalized contract costs
that were truly consistent with its own historical average, Western Union would have
actually missed EPS estimates by 2%. !
Stock Return Since
Adding to its short thesis, Anonymous contended that Western Union's tax
minimization strategy and perceived predatory business model could spur a public
policy backlash, which is certainly foreboding given the noteworthy impact of the drug
Average Daily Trading
pricing debate this quarter. But, regardless of whether the company sees any headline
Volume: $65.3 million
risk for its tax practices, Anonymous believes that the company's mysterious strategies
Borrow: <1%
suggest either a reliance on tax loopholes or an improbable tax rate near 0% for half of
its global remittance activity. In either case, the short-seller notes that Western Union's
"deteriorating business model" becomes more and more obsolete by the year.!
Announce: -12.4%
Currently, Western Union's shares are down about 12% since Anonymous released its report, so the stock still has
room to fall to reach the short-seller's predicted 30% downside. Still, the same short-seller says that based on the
company's historical precedent and the fundamentals of its business, an aggressive price cut is close at hand. If that's
the case, a negative correction could arrive swiftly.!
Recent Campaigns: Anonymous Analytics
www.activistshorts.com
11
January 8, 2016
Proofpoint, Inc.
Ticker: PFPT
Exchange: Nasdaq
Short-seller: Muddy Waters
Announced: 12-3-2015
Market Cap at Announce:
$2.95 billion
Market Cap Today: $2.49 billion
Price at Announce: $72.92
Price Today: $59.84
Short Interest: 15.3%
Stock return since
announcement: -17.9%
Average Daily Trading
Volume: $29.7 million
Borrow: <1%
At the Sohn Investment Conference
in early December, Muddy Waters
said California-based email security
company Proofpoint was not just a unicorn, but a "rocket powered unicorn." In its
presentation, Muddy Waters colorfully illustrated its unicorn and the company's
rocketing over-valuation in the face of increasing net losses. The short-seller darkly
concluded that, for Proofpoint, "The skies ahead aren’t so blue."!
True to the short-seller's classic style, Muddy Waters' Carson Block also raised
questions about Proofpoint's numbers, calling out both the company's fudged organic
growth figures and its exaggerated total addressable market for its Targeted Attack
Protection offerings. Block said that Proofpoint consistently represented acquisitions
as contributing little revenue and mischaracterized itself as part of a higher growth
market. !
The short-seller also pointed out that Proofpoint enjoyed touting itself as a "Leader" in
Gartner’s “Magic Quadrant," but Block indicated that Gartner actually called for low
single-digit growth in Proofpoint's mature market. Block added that decreasing spam
and business emails, as well as the migration to cloud email, would likely provide
further threats to the company's business. The short-seller particularly criticized
Proofpoint's failure to acknowledge the multiple competitive pressure that Muddy
Waters said are already eroding its premium pricing. !
Now, Block says Proofpoint is in the midst of a last-gasp effort to grab market share before some doubtlessly
formidable opponents move in, including major competitors like Google, Amazon and Cisco. Specifically, the shortseller noted that platforms like Microsoft have a long record of destroying businesses, since "good enough" often
wins the day. But Proofpoint's growth rate isn't the only thing at risk, as Block related that the entirety of the cyber
security market is coming "back to Earth." With Muddy Waters contending that "the more Proofpoint sells, the
more it loses," it may not be long before this unicorn's rocket runs out of fuel. !
!
Recent Campaigns: Muddy Waters
www.activistshorts.com
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January 8, 2016
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