There’s been major drama going on with one of Eric Fry’s recommendations in recent weeks. In short, a vicious attack by a short-seller resulted in a massive selloff. Eric’s pick was down 35% seemingly overnight. But that’s not the whole story… In today’s Digest, Eric pulls back the curtain on what actually happened, how the situation has played out since, and what we can learn from it. It’s a cautionary tale that illustrates two things… One, it’s incredibly important to do your due diligence before investing your hard-earned money into a stock. And two, you have to be careful whom you trust for accurate information. I’ll let Eric take it from here. Have a good weekend, Jeff Remsburg |
Beware Fake News
By Eric Fry
Soren Kierkegaard, the Danish existentialist philosopher once remarked, “Geniuses are like thunderstorms. They go against the wind, terrify people, clean the air.”
Short-sellers often perform a similar function. Although they certainly are not all geniuses, their incisive analyses can swirl through the financial markets and terrify investors for a spell, while cleansing the air of misinformation and/or fraudulent behavior.
Because these financial thunderstorms can strike an individual stock like a thunderbolt, they usually singe every investor who happens to be in the vicinity.
Not surprisingly, therefore, short-sellers are about as welcome on Wall Street as a thunderstorm at a garden wedding. To put it bluntly, most folks hate short-sellers.
I don’t. I hate the misinformation and/or deception that causes investors to make ill-informed decisions…
Steel Yourself Against the Misinformation
Generally speaking, short-sellers are a fringy community of forensic analysts and truth-seekers. As a group, they expose the sort of misinformation that deceives investors. That’s a public service to all of us investors.
But sometimes, short-sellers themselves, are a source of misinformation — fonts of fake news.
In other words, not all short-sellers are created equal… neither are any other sources of investment information and “analysis” equally reliable.
This fact has never been timelier and more relevant than it is today, when social media sites funnel most of the minute-by-minute investment narrative that we consume.
Because of social media’s scope and dominance, deceptions can magnify quickly and “go viral,” often with mind-numbing speed and destructive power.
In such circumstances, getting to the truth can be challenging.
But a couple of simple steps can facilitate the process of fact-finding. Both of these steps are so ancient (and timeless) that they predate the internet itself:
- Consider the source. Whenever you encounter a story that seems implausible or that conflicts with widespread opinion, check the source. Find the source of that story from the original source documents, if possible. Once you locate that source, check its history for honesty and accuracy. For example, a scientific observation from a Johns Hopkins University study is probably more reliable than one from National Enquirer.
- Look for signs of intellectual honesty. Does the source of the story thoughtfully consider the “other side”? For example, does the source solicit information from third parties to corroborate its findings? Does the source present its findings matter-of-factly, while acknowledging portions that may be inconclusive or incomplete?
These two simple steps, by themselves, can usually help investors navigate deception and/or discover truth… like they did during the last two weeks when a short-selling firm attacked Standard Lithium (NYSEAMERICAN:SLI), a stock I have recommended in my investment services.
On November 18, a short-selling outfit called Blue Orca Capital issued a negative report about the company.
The report’s most damaging assertion was that Standard Lithium’s direct extraction technology could recover only 13% of the lithium that is contained in the brines it is processing — not the 90% recovery rate the company had been reporting.
The stock plummeted 35% after Blue Orca’s report crossed the wires.
But I issued an alert to my subscribers that stated the following:
“If that assertion is true, it would be a truly damaging data point, perhaps even fatal to Standard Lithium. However, as recently as November 12, Standard Lithium submitted a detailed filing with the SEC that stated the following:
“The final product lithium recovery is about 90%.
“In other words, six days ago, the company informed a federal agency that its lithium extraction process recovers 90% of the lithium contained in the Arkansas brine it is processing.
“Not 13%.
“If the actual number is 13%, as Blue Orca Capital asserts, then the entire management team of Standard Lithium and its Board of Directors has committed a large-scale fraud…
“A conspiracy and fraud of this scale and complexity seems unlikely…
“More likely is that an ill-intentioned, or ill-informed, short seller has conspired to hammer the share price of a stock its firm has sold short.”
In other words, I considered the source of the surprising story and deemed it to be untrustworthy. Furthermore, previous reports by Blue Orca about other companies revealed a consistent pattern of unreliable, one-sided analysis.
Hours later, Standard Lithium issued a rebuttal to Blue Orca that confirmed my assumptions. You can view the entire release here: Standard Lithium Response.
But the most important detail from the company’s response was that its direct extraction technology does, in fact, recover about 90% of the lithium that’s contained in the brine it is processing.
The company stated flatly:
“Blue Orca Capital’s interpretation of lithium recovery rates is incorrect and underestimates lithium extraction efficiencies.”
Despite this comprehensive rebuttal, Blue Orca did not issue a mea culpa or concede defeat in any way. Instead, it simply doubled down on the identical claims Standard Lithium had debunked.
The new attack from Blue Orca triggered another wave of selling that pushed the stock lower again on Nov. 22. But the selling pressure abruptly reversed on the day before Thanksgiving.
That’s when the company announced a $100 million investment by Koch Strategic Platforms (KSP), a subsidiary of Koch Investments Group.
Importantly, the press release that announced this investment included the following line:
“[KSP’s] Direct Investment follows extensive due diligence into Standard Lithium’s LiSTR DLE technology, Demonstration Plant and project objectives…”
Presumably, therefore, KSP possesses a more intimate and sophisticated understanding of Standard Lithium’s extraction technology than do the short-sellers at Blue Orca.
The stock has been rallying ever since.
An Early Warning
To be sure, the short-seller’s attack on Standard Lithium was a frightening event. But ultimately, misinformation lost this battle.
Furthermore, the company has emerged from that attack with its credibility intact and its investment potential greatly enhanced by a major new investment from what could become a major strategic partner.
The stock remains what it was when I first recommended it to my subscribers: a speculative, unproven play on a “home-grown” battery-metals supply chain. But the stock has become somewhat less speculative in the wake of KSP’s $100 million buy-in.
Now, before I let you go…
