Backtesting Short Seller Ben Axler’s Performance at Spruce Point Capital (Part 1)

Summary


Background

I have always been in the camp that if a company is committing fraud, then I would like to know about it. About a year ago, Grizzly Research, now known to be ran by Siegfried Eggert, put out a report called Trulieve Cannabis Corp: Why we believe the Company is a Fraud. At the time, I did not follow the MSOs very closely, but skimmed through the report and felt it highlighted many points which traditional sell side analysts would gloss over. Unfortunate for Eggert, CEO of Trulieve, Kim Rivers, was formally an attorney and followed up with a lawsuit.

While putting out a short report on Trulieve was probably not Grizzly’s best idea (especially with the other choices in the cannabis industry), the firm has issued a number of interesting reports on Chinese companies. The China Hustle on Netflix does a great job talking about the securities fraud committed by Chinese companies listed on major U.S. exchanges.

More recently, Moez Kassam at Anson Advisors was exposed to be involved with a number of shady dealings between the LPs and MSOs on https://moezkassam.com. Upon being published, the website was DDoSed and eventually taken down, but the article was saved here at archive.is and outline.com.

@BettingBruiser on Twitter talked about this report and has highlighted Moez Kassam’s relationship with Ben Axler, which evidently led to Spruce Point’s short report on GFL. From context surrounding Moez Kassam, @BettingBruiser’s tweeted this today:

There is a lot more that can be said about what’s going on with Moez Kassam and Spruce Point Capital, but this led me to wonder – how have Ben Axler’s short reports fared over the past 10 years?


Spruce Point Capital

Since 2010, Spruce Point has put out 78 short reports, mostly published in the past 5 years.

I wanted to know what the average performance is following Spruce Point’s short reports, benchmarked against the S&P 500. On average:

  • Spruce Point’s shorted stocks bottom out at -6.4%, 7 days after the report drops.
  • Historically, the stocks recover after ~65 trading days (~3 months).
  • The shorted stocks catch up to the S&P 500 ~200 trading days after the report is published.

However, the backtest is skewed by PLUG, which Spruce Point claimed is “practically uninvestible with 100% downside risk” in its short report issued on December 19th, 2019. I am not familiar with the story, but ironically, PLUG has rallied 382% since the report. That said, if you exclude PLUG, Spruce Point’s shorted stock performance is slightly better, trailing the S&P 500 by an ~8% margin:

I also noticed that much of Spruce Point’s successful shorts came before 2016 when Ben Axler did not pump out as many reports. Looking at his (few) shorts between, 2010 and 2015, he had a decent amount of success:

However, his performance over the past 5 years have been a non-factor.

All this brain damage to pump out short reports that carry little merit have me wondering why the SEC allows short-sellers like Ben Axler to run rampant. I do not mind short selling, but this kind of activity appears borderline market manipulation.

That said, apparently Ben does not appreciate me looking into this.

Disclaimer: I did not account for the impact of dividends. I also excluded five companies which are now private (China Integrated Energy 12/5/2010, Bazaarvoice 6/14/2012, AsiaInfo-Linkage 11/12/2012, InnerWorkings 4/20/2013, and Intertain 12/17/2015).