Activist short sellers continued to outperform the overall stock market during the third quarter — but the real star was actually a long position made by activist Hindenburg Research, according to a new report from Breakout Point, which tracks the market.
Specifically, it was Hindenburg’s flip-flop on its Twitter short that Breakout Point highlighted as a top trade made by an activist short seller last quarter.
“While there were several successful campaigns, the winner of Q3 might be Hindenburg,” Breakout Point said. “Hindenburg first went short [Twitter] in Q2, only to then understand the potential for reversal of the events and bought stock in Q3.” The firm helmed by Nate Anderson said it closed out its long position in early October.
On May 9, the date of its initial report, Hindenburg wrote that “Musk holds all the cards.” As Institutional Investor reported then, the short seller argued that Musk’s plan to take Twitter private was a good thing — but that Musk could get it for a cheaper price.
At the time, both the market and Twitter’s performance had deteriorated substantially since Musk had first disclosed a formal offer to take the social media company private. Meanwhile, Hindenburg argued that the debt load to accomplish the deal was extraordinarily high, and the effort was hurting Musk’s other publicly traded company, Tesla .
On May 6, the last trading day before Hindenburg’s report, Twitter shares closed at $49.80. They had sunk to $36.75 — a decline of some 26 percent — by July 13, when Hindenburg announced on the social media platform that it was no longer short, but had in fact taken a long position. (Anderson said he closed his short position on May 17.)
The day before Hindenburg announced its long, news broke that Twitter was suing Musk after he had proclaimed that he was ending his $44 billion deal to buy the social media giant.
Twitter argued in its complaint that Musk had signed a binding merger agreement and “refuses to honor his obligations to Twitter and its stockholders because the deal he signed no longer serves his personal interests.”
As Hindenburg explained on Twitter, “Twitter’s complaint poses a credible threat to Musk’s empire.”
The short seller seemed to have assessed the situation correctly: By October 4, Musk had agreed to go ahead with the deal, at the original offer of $52.40 per share, at which point Hindenburg tweeted that it had sold the stock. By then, Twitter shares had jumped more than 40 percent since the short seller announced it had gone long in July.
While Hindenburg was busy going long, there were 24 new short activist campaigns during the third quarter, according to Breakout Point. The shares of those companies fell an average of 14.4 percent, compared the S&P 500 index’s decline of about 5.3 percent during the quarter, it said.
“The market's erratic trading in Q3 definitely allowed many activists to prosper,” Breakout Point said. “Furthermore, the trends we have noted in the past few months continued. While there were pockets of retail favorites, such as Bed Bath & Beyond, which were trending due to the infamous short-squeeze thesis, the overall mood of Reddit was much more favorable to shorts,” it noted.
Looking forward, Breakout Point suggested that shorts of ESG companies might become the latest rage among activist short sellers following Muddy Waters Research’s short of solar company Sunrun, which was first announced in August, then reiterated in October. Muddy Waters’ Carson Block argued that Sunrun had understated its future costs and inflated the value of its customer agreements.
“Muddy Waters has its ‘facts’ wrong,” responded Mary Powell, Sunrun’s CEO and director. “For over 10 years, our investors, lenders and independent authorities have closely diligenced our tax and valuation procedures, which Muddy Waters incorrectly describes.” Still, the stock has fallen about 20 percent since Muddy Waters’ initial report.