This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

Blogging and Shorting – Globo and Valeant

An organisation called Quintessential Capital Management (QCM) published a report on the 22nd October on Globo. The next morning the shares were suspended at the request of the company so as to enable them to provide a detailed response but they immediately refuted all the allegations in the report.

QCM acknowledged that they are active in short selling and have taken a short position in Globo. They also have links to Simon Cawkwell who was also involved in a similar attack on Globo in 2013. The main allegations then were that the Go!Enterprise product was not a useable software product and that profits were not turning into cash. The company’s share price subsequently recovered although criticism has continued on some bulletin boards.

The company recently tried to raise some high yield debt to enable it to make further acquisitions, but it has now abandoned that (perhaps because the appetite for high yield debt has substantially receded as the FT recently reported). Many investors, like myself, may have taken a dim view on this business strategy for a software company in any case although the low Globo share price made it difficult for them to make acquisitions using equity.

The latest allegations include the same ones as before but they also specifically focus on the company’s links to “suspected satellite” companies and partners/distributors even though I understand the company is now more focussed on direct sales based on recent comments from management. QCM claim that 60% of Globo’s sales may be fraudulent but they do acknowledge that “Globo’s cash balances may be genuine and backed by bank statements”. They also say that “it is also notable that, unlike many of its peers, Globo capitalizes its software development expenses, including a substantial portion of workers’ salaries” which seems odd when there are specific accounting standards that probably require them to do so nowadays – they may have limited discretion in that regard.

I will refrain from commenting further until the company issues it’s rebuttal. But some bulletin board commentators have already decided that the debate about this company is settled which seems premature before more information is available and analysis undertaken. Probably the best comment on this matter was that of Ed Page-Croft of Stockopedia who said those companies most discussed on bulletin boards are indeed those that may be most risky. I totally agree with that comment, if nothing else because they can easily become the target of speculators (as they are highly liquid) and hence vulnerable to stock promoters and shorters of all descriptions. We shall no doubt be discussing this area at our Masterclass event on the 4th November (see https://www.sharesoc.org/masterclasses.html ) where Quindell, another highly discussed and traded stock among private investors, will be on the agenda.

Incidentally, as there have been a number of problems with AIM companies (Chinese stocks, mining/oil companies) in recent years and ShareSoc has criticised AIM for lax regulation, it was interesting to learn at the London Investor Show yesterday from an attendee that AIM is recruiting more lawyers to assist on regulatory and investigatory matters.

Valeant

Another example of an attack by short sellers on a public company which was extensively covered in the Financial Times on the same day as the Globo suspension is that of Valeant in the USA. This company was already controversial because of its abrupt and large raises in drug prices after acquiring the producers. Now there is an allegation that revenues have been inflated by links to a network of pharmacies and short seller Citron suggested it was “Enron part deux”. Valeant has disputed the allegations, but the share price dropped by 40% over a few days.

This looks very much like a typical shorting attack, i.e. publish a highly critical article, without giving the company time to comment or rebut the allegations. Usually these allegations are published in the USA where libel law is more relaxed and make it more difficult for companies or their directors to contest such claims in the courts.

Note that the views above are solely those of the author. I have been refraining of commenting on Globo of late as the effort involved in analysing the conflicting claims and evidence, and debating the issues, was more than I cared to spend. But the above news seemed worthy of coverage.

Roger Lawson

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