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Early Opportunities
Get in Before the Crowd

September 11, 2020

Every so often one of our stocks is the target of a short report that tries to make the case that a company is garbage, a fraud, and/or wildly overvalued.


FAKE NEWS! Nikola (NKLA) Remains A Buy.

Every so often one of our stocks is the target of a short report that tries to make the case that a company is garbage, a fraud, and/or wildly overvalued. The attack playbook usually goes something like this:

1) Find a high-profile stock.
2) Write a short thesis report.
3) Wait until the stock has made a splash with some news, or looks a little extended.
4) Short it.
5) Publish the short report and distribute it via the web for free.
6) In that report:

a. Present a few compelling angles from which to attack the business.
b. Make bold statements that are lightly supported.
c. Ignore important aspects of the business.
d. Cover their butts by using carefully worded language.
e. Write a lot. Then write a lot more. This gives the impression of intensive research.

7) Wait for the selling to abate, cover the short position, make money, and look for the next target.
8) Watch the stock they attacked go back up.

The target right now is Nikola (NKLA), which fits the bill of a high-profile stock. It just released great news regarding its new partnership with GM. The author is Hindenburg. The allegations are extensive, but basically assert that the company is a fraud.

I’m not going to take the time to defend Nikola. The short version is that I don’t think it’s a fraud. I think the short attack is clear in its purpose and has thus far worked out quite well for Hindenburg.

The exhausting thing about these types of short reports is that there is enough there to make you concerned. You get the same feeling when your read through the “Risks” section of every company’s 10K and 10Q SEC filing, which explains every conceivable way the business could be negatively impacted (ironically, they usually don’t list potential short-seller attacks).

The truth is no company we invest in is perfect. There are risks. Managers of early-stage companies do a lot of things to advance their businesses. Not all calls made are the right ones.

But I really don’t think Nikola is a fraud. After a little while investors will forget about this report and go back to focusing on all the potential positives and negatives of this early-stage business, of which there are plenty.

To be 1,000% clear – I’m not saying NKLA’s stock is going to the moon and that it’s a great company today. It’s not. It’s a high-risk early-stage venture that represents an enticing investment to me and many other risk-tolerant investors. Over time, it could become a good company, and hopefully a great one. Or not.

It’s not for everyone. There’s a lot that could go right, and wrong. If it’s not for you, don’t invest.

But if it is for you, I suggest using this short-selling weakness to add shares. Just keep your position size reasonable. We are still building a half-sized position. BUY A HALF