‘It’s nothing personal,’ says short seller
‘It’s nothing personal. I have Canadian friends. I’ve been to Canada,’ says New York investor
Ben Axler is used to being alone on his stock calls.
In August, the U.S. short seller released a report criticizing Canadian space tech juggernaut Maxar Technologies Ltd., raising questions about some of its accounting practices and warning that the company ’s shares could lose more than half their value.
While Axler and his firm, NewYork-based Spruce Point Capital Management, were advising investors to sell, the Street was all but unanimous that he was wrong: Nine of 11 analysts held buy or outperform ratings, according to Bloomberg.
Maxar’s shares, which tumbled 13.5 per cent the day the report was released, even began to recover in September, before the bad news hit.
Two weeks ago, Maxar reported a $432-million net loss for the third quarter, mainly due to impairment losses and inventory obsolescence. Its shares, which had reached a high of $72.68 in July and were at $56.80 when Axler released his report, plunged more than 44 per cent to $17.68. They have since rebounded somewhat, and closed Friday at $24.63.
When it comes to shorting Canadian companies, Maxar is not the first time Axler’s patience has reaped rewards.
Since 2013, he has shorted six Canadian firms. One of them eventually delisted from the Toronto Stock Exchange. Another is now a penny stock. The six fell an average of 38.38 per cent over an average of 147 days.
“It’s nothing personal,” he says. “I have Canadian friends. I’ve been to Canada!”
Short sellers like Axler make money by borrowing shares of a company that they believe are overvalued and selling them. When the price drops, short sellers will buy back the shares for less than what they were sold for, pocketing the difference.
Yes, he wants to make money, but Axler describes himself as an activist short seller — someone who wants to also police the market.
He spends weeks investigating companies and their staff, including tracking the careers of CEOs who have a record of unethical practices: If they did it once, he theorizes, chances are they’ll do it again.
His team spends hours poring over earnings reports for clues, interviewing former employees and even speaking to competitors.
While his research is notorious enough that it can cause an immediate drop in the shares of a company he is targeting, Axler says a day-one blip isn’t enough for him. Sometimes he waits weeks to see a prediction come to fruition. In other cases, more than a year.
“There is this interesting psychology of investing,” Axler says. “Sometimes you look at a screen and see a price and certainly it can make me and many investors think that we’re wrong.
“Ultimately, the share prices will match up with reality,” he insists. “One way or another.”
Raised just outside Philadelphia, Axler has lived in New York City for 18 years but still tells family and friends that he’ll never consider himself a New Yorker.
The 41-year-old started his career as investment banker focusing on mergers and acquisitions for Credit Suisse Group.
In 2006, he was recruited by Barclays Capital but lost his job during the financial crisis two years later.
At 31, Axler wanted his own firm and no longer wanted to be beholden to banks that were becoming more and more regulated. So in 2009, he waded into the hedge fund business and started Spruce Point.
“There was a lot of office space (available),” Axler jokes, and outof-work lawyers looking to help.
Originally, the firm focused on long investing to take advantage of the “easy, stupid gains” on Wall Street at the time. When those disappeared in 2011, he turned to short selling.
It didn’t take him long to realize that there’s no “secret sauce” to short selling.
Each of his shorts has involved different investigative techniques. Before shorting social media company Momo Inc., he says he hired a private investigator on the ground in China to collect intel on the company.
In shorting Israeli countertop producer Caesarstone Ltd., Axler says he sent a piece of one of the company’s quartz countertops to a lab to test the company’s claims its products were made of 93 per cent quartz. (In a response to Axler, the company said it had always advertised their countertops as being made of “up to” 93 per cent quartz.)
In Canada, Axler’s first target was Just Energy Group Inc., a Mississauga, Ont.-based natural gas company that he argued in 2013 appeared to be stretching its balance sheet. The result, he said at the time, would be that the company would have trouble generating cash flow. Axler predicted the stock, which opened at $7.35 on the day he released his report, would drop 46 per cent. The decline was slow. After a year, Just Energy’s stock had declined by 20 per cent — less than half the amount Axler expected.
Short sellers can keep their positions open for as long as they want, provided they have the capital to cover losses and can pay the borrowing fees. Axler prefers to stick it out.
This past August, Just Energy’s share prices slipped to below $4 — five years after he made the prediction. Axler wouldn’t say whether he maintained that position the entire time, nor when he closed any specific short positions. It was trading at above $5.20 on Monday.
The wait wasn’t as long with Intertain Group Ltd., an online gaming company, and TS03 Inc., which sells sterilization tools for the health-care sector. Intertain, which was shorted in 2015, and TSO3, which Axler targeted in 2017, both saw their shares plunge in little more than a year.
The online gaming company caught Axler’s eye after it reported 38-per-cent profit margins following its acquisition of Gamesys Group Ave. — something that the short seller says appeared impossible given that Gamesys had never exceeded 25-per-cent profit margins.
In the two days following Axler’s report, Intertain’s stock dropped by 35 per cent. The company ordered an independent committee review based on Axler’s allegations and called them “grossly erroneous” in a press release. In the same release, three paragraphs later, Intertain announced that CEO John FitzGerald and CFO Keith Laslop — two people specifically criticized by Axler — would be moving on from their positions.
Just over a year later, the company delisted from the TSX and moved to the London Stock Exchange under the name Jackpotjoy Plc. A new listing of exchangeable shares, tied to the U.K. company, replaced it on the TSX.
TSO3, Axler alleged, overstated its market potential by hiding crucial information, such as its installed base, from investors. The company’s shares also declined rapidly. Within 14 months of Axler’s call, they had dropped to 38 cents from $2.57. They closed Friday at 43 cents.
TSO3 did not respond to a request to comment on the allegations.
“This might sound jaded, but every company I look at, the assumption is that the financial statements are wrong,” Axler says.
While he has had his successes, he will acknowledge his record is far from spotless.
A 2016 short of The Ultimate Software Group, Inc., a company that develops technology for the human resources field, has backfired so far, with the company’s shares price rising 36 per cent since Axler released his report.
“It hasn’t been one that’s been a success on paper if you just look at the share price,” says Axler, who added that he doesn’t consider the campaign a total failure because one of the people he targeted in his report — the chairman of the audit committee — eventually resigned.
Among Axler’s criticisms of Maxar, which had been known as MacDonald, Dettwiler and Associates before its takeover of U.S.-based DigitalGlobe in 2017, was that it “appeared to be overcapitalizing costs by inflating intangible asset purchases.”
Maxar would not comment on the allegations but, after a review by the audit committee of its board of directors, issued a press release on Aug. 24 that described Axler’s claims as “inaccurate statements and misleading conclusions.”
Following the first-day plunge, Axler remained patient with Maxar’s stock and it paid off.
After repeated prodding, he admits to having celebrated in a style befitting New York City.
“I bought my team a pizza,” he says, after finally relenting. “I’ll admit to that.”
Riding high from his success with Maxar, Axler’s newest target north of the border is a TSX darling.
On Oct. 31, Axler released a short report on Dollarama Inc., the Montreal-based dollar store chain that sells items for $4 and under, predicting a 40-per-cent decline in the share price. Dollarama, Axler says, appears to be the only dollar store that can produce 40-per-cent gross margins and 25 per cent EBITDA margins. “Either they’re very good and they’re the only ones in the world that can do this or there’s something nefarious going on,” Axler says.
Dollarama spokesperson Lyla Radmanovich says the company is aware of the report but won’t be commenting on it.
“We are confident that our existing disclosure provides investors with accurate, up-to-date and comprehensive information regarding our financial performance, outlook as well as our relevant governance, accounting and other policies,” she wrote in an email.
Dollarama’s stock closed about 4.6 per cent lower that day, falling to $36.65 from $38.45. The stock, which has struggled this year and fallen more than 32 per cent since January, reached a 52-week low of $34.31 on Thursday.
While the pace of the decline has been slower than Axler hoped, it hasn’t changed his opinion on the ultimate outcome.
“It just takes time,” he says.
Ultimately, the share prices will match up with reality. One way or another.