Last October, shares of NQ Mobile, a Chinese company that provides security apps for mobile devices, were trading at around $25 each. By the end of the year, however, its stock had been slashed by more than half to around $11 per share.
The reason: short seller Carson Block. And Twitter.
Block, who is notorious for issuing scathing reports detailing suspect accounting practices at publicly traded Chinese companies he is short selling, used Twitter as the launching pad for his attack against NQ Mobile, tweeting multiple times a day to the nearly 15,000 followers of his hedge fund research firm Muddy Waters his belief that the company was fraudulent. And though shares of NQ Mobile are trading back up around the $20 mark today, investors who were short the stock in the fourth quarter of last year stood to make a killing.
“We started our Twitter account initially as a way to disseminate information about the companies on which we write,” Block said in an email to BuzzFeed. “The companies have a lot of resources — shareholder money — to fight against us, and Twitter was a good way to constantly communicate with people both in the U.S. and in China.”
Indeed, Twitter has become a favored channel for short sellers, or investors who bet that a company’s stock will fall instead of rise, who are using it to not only disseminate investment positions and research, but also to raise their profiles. Tweeting one’s investment position, known in industry parlance as “talking your book” is becoming increasingly prevalent, thanks in part to last summer’s passage of the Jumpstart Our Small Businesses (JOBS) Act.
While Block is often cited as one of the originators of the internet short report, he is by no means alone. Prescience Point, a hedge fund research and short selling firm, earlier this year took a short position in auto parts company LKQ Corporation and began tweeting about how it believed the company was overvalued and had management issues. In just a week, the stock plunged more than 20% from $32.29 to just under $26 per share.
“We decided to start a Twitter account a little over a year ago, and as we’ve put out more accurate, respected reports on certain companies, we gained a Twitter following,” said Ben Axler, cofounder with Eiad Asbahi of Prescience Point, which has a little over 2,200 followers to date. “We tweet incremental bits of information after we put out a report.”
Hedge fund Kerrisdale Capital experienced a similar outcome around this time last year when it began tweeting about its short position in semiconductor manufacturer EZChip, whose stock dropped to around $21 per share from just over $25 in two months.
“Twitter is increasingly used as an outlet to distribute research to the investing community,” said Kerrisdale founder Sahm Adrangi, who has actually developed an entire strategy around Twitter that he has coined “tweetvesting.”
“Whereas previously only the sell-side had channels to distribute their research, Twitter is now allowing other market participants to share their opinions with a broad audience of investors. It’s a key contributor to the overall democratization of research that’s been occurring over the past few years,” said Adrangi, whose hedge fund has more than 4,500 followers on Twitter.
The ability to reach all kinds of people with hedge fund-level investment intelligence is leading more and more firms to simply release their research via Twitter.
Among the firms that have taken directly to Twitter to disseminate their research are Citron Research with 11,000 followers, Infitialis with more than 2,500 followers, and Geo Investing, a hedge fund research provider best known for its successful short ideas, as well is its cannabis screen that tracks the performance of pot-related stocks since the proliferation of legalization.
“We want to provide hedge fund research to common investors,” said Dan David, who runs Geo Investing along with Majid Soueidan. “Many of the people who follow us aren’t the hedge fund community, but interactive brokers on E-Trade with a limited amount of time. It’s research they can’t get from hedge funds.”
According to these short sellers, Twitter acts as a tool to pressure a company’s stock price, even if the information reaches unaccredited (read: non-hedge fund) investors, and gives investors an alternate voice outside of the big banks that research and invest in public companies.
“The idea is to provide value-added, unique, accurate research that is often controversial, but creates a more accurate reflection of a business’s fundamentals and fundamental value,” Prescience Point’s Axler said. “The research at a bank is an inherently biased view of the stock because they have an interest in it. Sometimes banks fail to question some of the assumptions that companies make in trying to get people to buy their stock.”
Another benefit of using Twitter is hedge fund managers and research providers’ ability to share their their voice during a company’s earnings, especially when the company doesn’t give them a chance to comment.
“We don’t tweet all of the time, but we try to give very high-value content when we do,” Block said. “Another advantage is when a company has an earnings conference call with investors, we can give a running commentary on Twitter and also ask questions that some of our followers may ask of the company’s management on the call. They usually don’t let Muddy Waters ask questions.”
And when it comes to pressuring a stock price or even launching a proxy fight, Charles Elson, corporate governance professor of finance at the University of Delaware, says Twitter is just one of many tools that a hedge fund manager can use to broadcast their message to the public.
“It’s a reason to let the world know what they’re up to,” Elson said. “If you’re in a proxy fight you’d use every tool that you possibly have. There are certain legalities you have to follow in getting your message out, but it’s another way to get your message out in a proxy fight.”
Put simply, the more people you can reach with your message, the better.
“Big picture, if you’re shorting a company and you want the stock to go down, the more people that hear your negative views on the company and understand those negative views, the more pressure there will be on the stock to decline,” said Don Steinbrugge, managing director of hedge fund marketing consultancy Agecroft Partners. “You know some negative information on that company that you don’t think the market really appreciates and you want to use social media to broadcast and the stock will go down.”