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Viceroy’s latest research report on a South African stock targeted Capitec* and it has pretty much everybody in the market freaking out for a bunch of reasons.
But first, here’s a thought. The Viceroy report on Steinhoff came out after the CEO quit and the company admitted fraud.
But what if the report had been released a week earlier? Ahead of the Steinhoff announcement of fraud? Would we have believed it? Would we have rushed to trash Viceroy, defending Steinhoff against the allegations?
I am fairly sure we would have attacked Viceroy, as is happening with the Capitec report. I agree we must remain sceptical at all times. But we should remain sceptical of both sides of the story – the report and the defence.
Viceroy is now being accused of all sorts of crimes, but the truth is that shorting Capitec and then releasing the report is firstly perfectly legal and, more importantly, an imperative part of an efficient market.
Essentially the market is a voting machine. Buyers and sellers (including short sellers) get to vote their views via the process of buying or selling, and eventually a winner is declared by the overall movements of the stock we’re “voting” on.
This is nothing new and even in South Africa we’ve had active short traders, mostly larger hedge funds, but also small private clients using derivatives to short shares.
The difference is that Viceroy has brought the American style of shorting to our market and we’re freaking out.
In the US there are short-only funds that actively hunt out potential short stocks. They do their research, short the share and then they release very aggressive and often hysterical reports.
They get as much media exposure as possible and do everything in their power to drive the share price lower in order for them to profit.
If you want to see an example, watch “Betting on Zero Official Trailer 1” on YouTube. It is a trailer for a movie on the famous Bill Ackman short on Herbalife, which is wild. I also suspect that such strategies are the future of our markets.
Locally, we’re used to short sellers flying below the radar. When companies do put out sell recommendations on a share, they typically do so quietly. For example, Deutsche Bank has just issued a sell on Capitec with a price target of R360.
Not much worse than Viceroy, but we’re objecting to the Viceroy report because we consider it insider trading, because we think it’s dangerous – but it is just the market voting-machine at work.
The insider trading issue is very important. Viceroy does its research and then takes a short position. This is not insider trading.
That would require Viceroy to be an insider or have privileged insider information. Neither is the case here.
In fact, this is no different from an analyst researching a stock, buying it for client portfolios and then writing bullish reports. It is only the language that is different and it is shocking to us.
The other issue is that maybe Viceroy is wrong, and it may well be. But who hasn’t been wrong before?
Anybody buying Steinhoff before December 2017 was 100% wrong; it is the nature of a market. Wrong is not an issue; the voting will sort out the wrong.
If, however, Viceroy knowingly publishes false information with the intention to collapse a share price, that is different.
But my reading of the report is that it is raising questions raised by others, albeit those others have maybe done better research and used milder language.
We need to get used to this aggressive style of shorting in our market whether we like it or not, as I think we’ll see more of it in future.
*The writer owns shares in Capitec.
This article originally appeared in the 15 February edition of finweek. Buy and download the magazine here.
