Any high-flying company can become the target of a short seller report. That’s their business.
The short sellers wouldn’t come out with a scathing report on Peloton (PTON) at $4.50, there’s just not enough skin on that bone.
But an AI giant like Super Micro Computer trading at $500? Now we’re talking.
One of the problems with being one of the new “hot stocks” on Wall Street is that its easy to make investors nervous about how quickly they’ve risen in the ranks.
This Isn't Hindenburg's First Time Around
Two years ago, when the lithium trade was white hot, Hindenburg Research issued a scathing report on Standard Lithium’s mining processes as they announced that the firm had a newly opened short position.
Up to that time, the stock was hot. Standard Lithium and other lithium companies were the answer to growing demand for EV Batteries. SLI shares were up 1,500% in less than two years, just like some AI names we know.
After the report, the stock shaved 40% of its value in just a few weeks as the market reacted to the report with widespread selling.
Shares rolled into September 2022 having lost nearly 70% from their highs posted just ahead of that Hindenburg Report.
In September, the company responded with news that they had hired outside engineers to assess their process and make improvements. The company was addressing part of what Hindenburg had pointed out was the problem, but it was too late.
Hindenburg certainly made money from their shorts. Investors had lost billions, and the lawyers are still trying to file lawsuits to claim losses and damages. The latter is not likely to happen.
We’re seeing another example of Hindenburg’s short selling strategy hitting the wires, and it’s hitting an AI darling hard today.
Hindenburg released their latest report on none other than Super Micro Computer (SMCI).
The report has several claims including…
that Super Micro rehired executives previously involved in accounting scandals and criticizes the company for maintaining secretive transactions with related companies controlled by family members of the CEO, which were not fully disclosed, potentially skewing financial figures and margins.
Also…
that the company might lack a competitive edge in the market, with some customers reportedly moving to competitors due to issues with product reliability and service quality.
To say that the report is damning is an understatement, and for long-term investors – like myself – it’s a gamechanger.
It’s part of the strategy of the short sellers, but this report’s timing was impeccable.
Shares of SMCI were trading 57% off their March lows after the company reported lighter-than-expected earnings in August.
Before the earnings report, Super Micro Computer’s management failed to give early guidance on their upcoming quarter’s revenue, something the company had done for years.
Earnings and revenue were lighter for the quarter, so sellers relentlessly sold the stock to $500, a number that I pointed out for its round-numbered support qualities just last night.
That psychological number has now been breached, with the stock heading towards the $400 as I type.
A decline below that $400 level is likely to see another round of short-term buying as traders eye $400 as support, but that’s going to be a band-aid on a bullet wound.
No, today is a day that changes the look of Super Micro Computer.
That quote is attributed to John Maynard Keynes. I say attributed because it has also been claimed that Keynes wasn’t the source. That’s not why we’re here, so let’s continue.
This morning, to make matters worse, Super Micro Computer announced this morning that the company would be delaying the filing of its Form 10-k with the SEC.
A Form 10-K is an annual report filed with the SEC by public companies, detailing their financial performance, operations, and risks. It includes financial statements, business descriptions, and management's analysis, serving as a comprehensive source for evaluating a company's fiscal health.
News of the delayed Form 10-k is a bad look in its own. In addition to the short report from Hindenburg this morning it looks downright incriminating, or at least that’s how investors are seeing it today.
These are the situations when you need to take emotion out of the “trade” and allow things to slow down before making your next move.
In hockey, the penalty box is much more than a penalty. It’s a few minutes to take an instigator out of the game. Let things slow down. Let things settle before the player gets out there again.
That’s where Super Micro Computer is, the Penalty Box. Two minutes for reasonable thinking.
We’re already seeing headlines exclaiming that it’s time to “buy the dip”.
It’s not that time.
It’s time to let the market wring every little bit of pessimism out of this stock before buying another single share.
When will you know that the pessimism is gone? A good start is that you won’t see a single headline telling you to buy the dip.
For now, it’s time to let the dust clear and wait. Watch for some support at $400 and $425. The latter is the price where Super Micro Computer’s 20-month moving average currently sits. That’s the line of demarcation between a long-term bull or bear market trend.
Keep an eye on these prices closely. A move below $400 will draw a new round of sellers, Wall Street Analysts, into the market with downgrades and lower price targets.
Those investors that can't resist the idea of buying this dip may want to eye the $250 level.
This would represent another round-numbered support level and the consolidation zone that the stock built in late 2023.
