Leverage Short Reports, Don’t Fear Them Written By Alexei Rogatkin
S
hort reports have been a prevalent part of the stock market for decades, but have notably become more common over the last several years. There were an average of 2.5 reports per year between 1996 and 2009, but that number has grown to a whopping 35 reports per year from 2010 to 2018. As such, navigating the muggy waters of short reports is an increasingly important skill for investors, both institutional and retail. Short reports refer to when a short-selling institution releases a document detailing their reasons to short sell a stock. These reports often drum up negative speculation among investors, leading to a sharp drop in the stock prices of the companies in focus. On the other hand, many investors rely on such price drops to buy stocks at a discounted price. Thus, short reports create opportunities and carry inherent risks that make analyzing these companies challenging.
On Wednesday, October 7, 2021, Scorpion Capital -- one of the most notable short selling institutions in the United States -- released a report on Ginkgo Bioworks (NYSE: DNA). In this “harshly critical” report, Scorpion called Ginkgo a “colossal scam, a Frankenstein mash-up of the worst frauds of the last 20 years.” Unsurprisingly, in response to the report, Ginkgo’s stock price fell from almost $12 to $9.47 in just four days. A steep drop in price represents one side of what is called the “short report debate”: the push and pull of investors’ reactions to short seller reports. Cathy Wood, a notable institutional investor, exemplifies the other side of the debate. Ginkgo is a stock that Wood backed heavily leading up to the short report. Wood, however, did not flock away from Ginkgo following the short report; she doubled down on it,
18
Cornell Business Review
buying over 8 million shares for her funds. Interestingly, from Monday, October 11 to Tuesday, October 19, Ginkgo’s stock price skyrocketed from $9.47 back up to $14.81. DNA now sits at $12.97, holding relatively constant since the short seller report. Many investors lost millions of dollars, but if an investor timed their purchase correctly, one could have grown their investment by over 50% over the course of a few days. As such, the “short report debate” continues to rage on as short seller reports get released. Although most investors see short-seller reports as a signal to avoid or short the attacked equity, short seller reports create buying opportunities depending on who releases the report, the response of the attacked company, and the characteristics of the attacked equity.
“
Although most investors see short-seller reports as a signal to avoid or short the attacked equity, short seller reports create buying opportunities depending on who releases the report, the response of the attacked company, and the characteristics of the attacked equity.
Since short sellers hold the equities that they report on, the short-seller has a monetary incentive to make the equity appear fundamentally overpriced. In some cases, short
