Don't Believe Everything You Read
Shaun is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When I think of stock manipulation, I normally think of the late 90s, when the internet and AOL was just getting into peoples homes. At this time, the public was unaware of the schemes of many pump and dump scam artists touting their penny stocks. Yet, apparently, the internet does not catch on, even after over a decade. There have been a few articles recently, often by anonymous authors with declared short interest in the stocks, which seemed designed to manipulate stock prices. Let us take a look at what has happened.
Ebix: Target of two anonymous short selling attacks
Ebix (NASDAQ: EBIX) is a supplier of software solutions to the insurance industry. On Mar. 22, 2011, an anonymous short seller calling themselves “Copperfield research” wrote a report on Ebix accusing it of bad busness practices, including aggressive, possibly illegal accounting. The market read this report, and, within a few days, the stock dropped around 25%. I don't know enough about accounting to evaluate Copperfield's claims, but there was no investigation by the IRS or SEC following this report, despite Copperfield insisting that they have forwarded their report to these government regulators. In fact, all of the issues within the report appeared to have no impact on the company. A few days ago, another anonymous blogger “Gothem City research” published a similar article attacking Ebix' accounting practices. Well, the market apparently forget how the 2011 report had no bearing on the companies busness practices. The stock plunged about 36% before the company attended a conference call addressing the accounting practices raised by Gothem City. The stock is still down about 20% from where it traded before the Gothem City article.
Boulder Foods: Is the Specialty foods market going to crumble?
A food distributer specializing in specialty and ethnic foods, Boulder Brands (NASDAQ: BDBD) was also the target of an anonymous short article recently, this time attacking the companies Udi and Glutino brands, saying that the gluten intolerant “fad” is ending, and that stores were often giving Boulder's products bad visibility. The article also attacked Boulder's patterns and accounting practices. The stock dropped 40% on the articles release, and is still recovering. I am amazed at how much the stock price has fallen from this article... it did not really add any new information that was not publicly available already, and the anecdotal evidence about Udi and Glutino product placement the anonymous short seller uses, in my opinion, is dwarfed by looking at growth trends the company releases in it's public filings. The company also had a great fourth quarter, showing strong and growing sales.
LINE: Inappropiate hedging?
Finally, an article in Barron's suggested Linn Energy(NASDAQ: LINE), an extractor of oil and natural gas, was guilty of accounting misconduct by suggesting that the company was performing accounting shenanigans by hedging the companies product to protect against sudden price decreases. The company has since released a very well written statement, explaining their business practices. There is also an excellent discussion of this whole debacle here. Frankly, I'm surprised the Barron's author could make this mistake, as hedging is a fairly common practice that many producers of goods use to stabilize their income. Since the Barron's article, LINE's stock price has fully recovered.
Stop taking everything you read at face value!
I'm not going to examine these articles and tell you if they are correct. Rather, I'm just going to point out how ridiculous that someone can write an anonymous post on the internet, offer almost no new information, and cause the stock to spiral down 25% or more. Ben Graham, in his book “The Intelligent Investor” talks of how you shouldn’t let the authors personification of market sentiment, “Mr. Market,” dictate the value of companies you own. I would argue that you should also not let a single, often anonymous, short selling author with a pretty report tell you how to value your companies either. Particularly when major, competent, and trustworthy companies who follow these securities have failed to find any wrongdoing. Often times, such as in the LINE article, the panic generated by these articles can be excellent buying opportunities.
Shaun Geer is long EBIX, and short $15 september 2013 puts on EBIX