I tell ya, there’s nothing worse than watching a stock you own do a tailspin.
We’ve all been there, and we’ve all felt that uncomfortable feeling in our bowels while witnessing that screaming bright red downward arrow, blinking in rhythm with a plummeting share price…
Sometimes a company will take a hit after reporting a disappointing quarter.
Sometimes a major crisis or event will be to blame. We can look to the recent and still ongoing nuclear power plant crisis in Japan for proof of that.
And sometimes, the broader market just slips and takes everything down with it.
I’m no fan of losing money due to any of these factors. But at the end of the day, it still beats watching one of your stocks take a nosedive because of some questionable media reports.
It’s a Shorty-Short World
A few weeks ago, there was an article basically blasting a company called Advanced Battery Technologies (NASDAQ: ABAT). It was submitted by Variant View, and the author of the piece listed 12 reasons why he was shorting the stock.
Some of the reasons sounded legitimate (assuming they were true) and some were sketchy…
For instance, reason number two stated the company led investors to think it made cutting-edge electric cars, when in fact it produced cheap scooters and bicycles.
I’m quite familiar with this company and I’ve never seen any evidence that it said it was making cutting-edge electric cars.
In fact, a couple of years ago when I was doing early research on the company, the big sell was the fact that they were hitting the scooter and bicycle market.
You see, we do spend a lot of time here focusing on electric cars and trucks. But we have to remember the world is not only what we see in our backyard. I’m reminded of this every time I go to Asia or Europe and see swarms of daily commuters on scooters and motorcycles.
In 2009, Chinese consumers purchased 21 million electric bikes. China actually has about four times as many electric bikes on the road than it does cars. And in Europe, it has been estimated that for 2010, about 1 million electric bikes will have been sold…
So when the folks at Variant View wrote about ABAT producing cheap scooters and bicycles — and did so in a sort of mocking tone — I was a little suspicious.
After all, the electric bike and scooter market is not a market to ignore.
Of course, accusations regarding the Chairman of ABAT transferring ownership of ABAT’s key subsidiary to himself without explanation or compensation — the number one reason listed in the article — was certainly enough to make me suspicious of potential wrongdoing within the company.
That being said, I certainly don’t buy for a second that these pieces are written to help warn investors of shady stocks…
Because there’s no money in that.
Analyst Tate Dwinnell described it best in an update he did on ABAT:
It seems the name of the game, particularly this year, is run through the financial statements and conduct interviews of China based companies to find evidence of shady dealings of fraud. Then short the stock and publish the piece which will be picked up by Seeking Alpha. Profit handsomely. Wash, rinse, repeat.
Citron Research was really the first firm to have an impact in this regard, but lesser known firms are joining the ranks as well such as Muddy Waters and Variant View Research. The research is often very thorough and compelling and the stock usually plummets in response. Often times it doesn’t come back.
Of course, this doesn’t mean the damaging accusations are untrue. These guys spend a lot of time picking these things apart and pinpointing inconsistencies, and most times, I wouldn’t bet against them.
But in the case of ABAT, I’m not convinced. Especially after reading ABAT’s response to Variant View’s original piece…
The company’s response was pretty solid, and as a result, the stock jumped more than 20 percent.
Not wasting any time, Variant View responded to ABAT’s response with what seemed to be a little less convincing than their original piece — particularly, a part where they drew attention to a semantics issue (i.e. What is an accurate description of an “electric vehicle”?).
Again, I’m not discounting Variant View’s research. They may be onto something.
But whether their accusations are legitimate or they’re just running a sick game to make a quick buck doesn’t change the fact that this stock is going to struggle for a while. And it will likely be the target of future copycat pieces on the company, which of course could add even more fuel to the shorting fire.
Bottom line: Shorts made a killing on this one.
Pounce Early, Pounce Often
I’ll be the first to admit I’m not a big fan of shorting stocks. I’ve only done it a few times, and only on the advice of those who have a consistent track record when it comes to finding the right stocks to short.
And no, I’m not talking about those handful of research firms that put out a few articles every year announcing to the world why this stock or that stock is about to take a lashing…
I’m talking about the guys who do this kind of thing on a daily basis.
They pounce early, they pounce often — and they have the gains to prove that if you’re in with the right folks, you can consistently make small fortunes.
Look at Ian Cooper, for instance.
Ian is the genius behind Options Trading Pit. And in the last month alone, Ian has delivered the following gains for his readers:
- Coach (NYSE: COH) – 43%
- Tiffany & Company (NYSE: TIF) – 33%
- Dow Diamonds (NYSE: DIA) – 103%
- Veeco (NASDAQ: VECO) – 42%
- Cameco (NYSE: CCJ) – 114% in one day!
And again, this all happened within a single month!
This, my friends, is how you make money in the shorting game. If you’d like to read more about Ian’s strategy and his next pick, click here.
And if shorting isn’t for you, you might want to keep a close eye on Advanced Battery Technologies.
The company’s going to have a tough road ahead after such damaging coverage…
But if it turns out Variant View did get it wrong on this one, ABAT could prove to be a big winner for those who picked it up while it was still battered, bruised, and fighting to defend its reputation as a serious player in the world of energy storage.
If Variant View was wrong, this stock could be back to $4.00 by the end of the year.
To a new way of life, and a new generation of wealth…
Editor, Energy and Capital