Short Activist Spruce Point Soars in Turbulent Year for Short Sellers

Despite all the public outcry against short sellers, a number of them survived 2021 just fine. A case in point is Ben Axler’s Spruce Point Capital, whose flagship hedge funds gained 21.4 percent on a net basis, according to a letter to investors.

“Last year was marked by volatility and speculative bubbles in the equity markets which provided a favorable backdrop for our fund,” Axler wrote investors in the year-end letter obtained by Institutional Investor.

Axler acknowledged that 2021 “did bring significant challenges for the short selling community, forcing some notable investors to exit the space amid a relentlessly bullish environment.” The Reddit-fueled attack on short sellers in so-called meme stocks like GameStop and AMC Entertainment started the year off on a sour note, with a far-ranging Department of Justice probe of activist short sellers adding to their woes. 

But Spruce Point found plenty of opportunities. Shares of its shorts were down an average of 44 percent from the day before the short reports were published to the end of the year, according to Breakout Point, a research firm and data provider. Those numbers tied Spruce Point with Muddy Waters Capital for eleventh place among activist short sellers last year, a Breakout Point analysis shows. 

If there was one particular bright spot for short sellers like Spruce Point, it was the collapse in the shares of special purpose acquisition companies. 

“We found a troubling theme of companies with long histories of zero profitability, speculative growth stories, low quality management teams, and egregiously high valuations coming public through SPACs,” Axler wrote in his letter to investors.

SPACs provided the grist for three of Axler’s short calls. One was Danimer Scientific, whose shares had fallen 66 percent by year end after Axler’s initial report on April 22. Spruce Point wrote three separate research reports on Danimer, which garnered the ESG label by marketing what it claims is biodegradable plastic. Following Spruce Point’s reports, the company reported it had received an inquiry from the Securities and Exchange Commission.

Spruce Point had pointed out corporate governance issues with Danimer’s executives and argued that its “production figures, its pricing, and rosy financial projections simply do not add up,” basing its analysis on a FOIA request. In response, the company claimed that Spruce Point’s research “lacks appropriate context and demonstrates a limited understanding of our business and the decades of extensive research, proven science, and execution capabilities our company is built on.”

Danimer now trades around $7 per share, well below the $10 SPAC IPO price.

Spruce Point’s two other SPAC shorts were also profitable. Seattle-based Porch Group, a software provider to the home services industry, fell 10.1 percent by year end from the day before the report on April 8 — though it has not met Spruce Point’s target of a 50 percent decline. 

Axler called Porch “a classic example of a company that has never found a business model that makes sense and was in technical default with a going concern warning before using the frothy SPAC market as an opportunity to allow insiders to dump shares.” He added that “having been conceived nearly 10 years ago, Porch has pivoted its business model multiple times, and we believe has never generated a single dollar of operating cash flow.”

However, real estate industry expert Nathan Thornberry came back with a detailed report acknowledging the stock is speculative but refuting Spruce Point’s claims, calling them “100 percent inaccurate.” The stock now trades above $12, which is higher than its $10 IPO price.

Spruce Point’s third SPAC short was Genius Sports, which bills itself as the “official data, technology, and commercial partner that powers the global ecosystem connecting sports, betting, and media.” By year end, shares had fallen 52 percent from the day before the Spruce Point’s August 5 report, which argued that Genius was “an overhyped revenue growth story assumed to benefit from the broader sports betting market [that] is facing competitive pressure and is unlikely to achieve its stated 25%+ growth targets.”

Genius did not respond to Spruce Point’s assertions, but it announced a deal with DraftKings the day the report came out. Still, the stock has tumbled and now trades below $7 per share. 

Spruce Point is known for the sheer volume of its work output, last year publishing short reports on 11 different companies during the year — the most of any of the activist short sellers among the top performers. It's quite a feat, since Spruce Point has only three employees, including Axler, the founder and chief investment officer, Daniel Oliver, chief operating and compliance officer, and analyst Jeff Cherkin.

According to Breakout Point’s analysis, Spruce Point has closed out his shorts in four companies: Nuvei, Lightspeed, Oatly Group, and Magnite.