November 22, 2018 / 5:16 AM / 19 days ago

Breakingviews - Short-seller tries tricky electric-car U-turn

Chinese electric vehicle start-up Nio Inc. vehicle is on display in front of the New York Stock Exchange (NYSE) to celebrate the company’s initial public offering (IPO) in New York, U.S., September 12, 2018. REUTERS/Brendan McDermid

HONG KONG (Reuters Breakingviews) - Short-selling is tough, but picking winners may be just as difficult. Andrew Left’s Citron Research, known for negative reports on stocks, is now backing both Chinese electric-car maker Nio and Elon Musk’s Tesla. Conceding the dominance of Musk’s creation and then betting on a rival is a challenging combination.

Citron’s reversal last month, switching to a positive view on Tesla, dismisses arguments mounted in the firm’s earlier screeds – including the threat of a “Tesla killer” competitor. It’s also flattering to Musk’s $58 billion company to compare its Model 3 sales to those of individual models made by the likes of Mercedes and Audi, which offer cars in many more shapes and sizes.

Left’s note this week on the $8 billion Nio, which went public in September, offers food for thought. But it’s more qualitative than quantitative, using the carmaker’s ad campaign and a series of stilted interviews with drivers to talk up the brand’s potential. It fails to address the somewhat problematic hard numbers in the company’s recent third-quarter results, which show a $1.4 billion net loss attributable to ordinary shareholders, as well as several thousand cancelled orders, according to analysts at UBS.

There is room for more than one successful electric-vehicle maker, but in China especially EVs are likely to become a crowded market. And it’s contradictory to argue for Tesla’s pre-eminence and then also support a fairly direct rival. It frames an interesting challenge for Citron, arguably shared by other short-selling specialists.

This year Left’s outfit has issued several perky opinions, championing the likes of smartwatch pioneer FitBit and tobacco-turned-cannabis company Pyxus International. Citron has enjoyed some success as a short seller, according to data released by GMT last year. The question is whether the analysis and tactics that drive down a target company’s share price can readily be recalibrated to trigger a rally when Citron publishes optimistic research. Positive research is a more crowded market, and if there is good news, the chances are a company’s PR machine will get there first.

To be fair to Left, since his endorsement Nio’s shares have climbed 7 percent. Tesla’s are up too. But Pyxus shares have lost two-thirds of their value since Citron’s October report. A short seller U-turn could still make for an uncomfortable ride.

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