Citron Research and Separating Pitches from Pumping
Famed short seller Andrew Left is known for damning short reports that have taken down numerous frauds over his 20 years at Citron Research. However, in early 2021 on the back of the Gamestop meme squeeze he shifted his fund to be long only. He still releases research on companies, but is now only focused on the long side having presented pitches for $WISH, $INVZ and $GEO. This research has received criticism from many for being over promotional and biassed, with the subsequent rises and falls in price from Wish and Innoviz inviting accusations of ‘pumping’. I want to take a closer look at Citron’s research, and identify how we separate a stock pitch from a stock pump.
The first thing to note is how Left’s background in short selling likely sets a poor precedent for his long pitches. While short reports should theoretically present a fair, neutral and balanced view of the business, in reality they often don’t for a few reasons. To be fair, one reason is that there often isn’t a bull case. When writing a report on a fraudulent company there isn’t a way to present things in a balanced manner as the company is just lying about their financial position. Fraud shorts are terrible for rewarding confirmation bias, as just focusing on the red flags will often pay off if that company is actually a fraud. On the more cynical side however, short sellers, unlike traditional investors, are against the clock. With maximum 100% upside and businesses tending to grow and improve over time, a short report on a non-fraudulent company aims to bring down the price quickly. Short sellers are often incentivised to ignore a balanced, well rounded look at the company in order to present the most damaging, negative view possible to reduce the risk of a company with issues turning things around, which often will lead to an understating or even ignoring of the risks to the thesis. An example of this is Citron Research’s 2 short reports on Shopify which naturally painted a bleak picture of the company’s business practices however failed to adequately discuss any of the long term tailwinds and competitive advantages of the business as risks to the short thesis. Even after dropping 70% from high’s Shopify is still trading almost 400% higher than the price at release. Shorting is as much a sentiment game as it is a fundamentals game, and short reports are written with that in mind so Andrew has been essentially trained to write one sided stock pitches with the explicit aim of moving the market.
There are a few key behaviours that I want to focus on exhibited by Citron. The first and most important is the level of balance in the report. Anyone who has read my previous pitches knows I like to dedicate a few paragraphs to the risks and downsides I see to the idea. There’s no such thing as a free lunch and every long idea has ways it could go wrong. In Citron’s 15 tweets about private prison company Geo Group they had not 1 negative thing to say about it. Meanwhile, Innoviz announced a highly dilutive capital raise a week after Citron’s research caused the stock to rise 25%. Citron hadn’t flagged liquidity and dilution as a potential risk in their research. A good stock pitch can argue strongly for the bull case, but should at least identify and recognise the risks, even pointing out why they might be misguided. The only purpose for ignoring these is if you are pushing some sort of agenda. If you are following someone who dismisses and ignores risks to their company you should always be wary about their intentions as it may indicate an attempt to mindlessly pump the stock.
The next behaviour I want to look at is variety, in my opinion a big red flag in a stock pitch is an account’s sole focus on a single stock. Normal market participants are interested in a variety of companies and tweet accordingly. Admittedly, this may have been born out of their time activist short selling where attention is key and you focus on a few stocks you have very strong opinions about. Unfortunately that just doesn’t translate well to pitching on the long side. While in itself tweeting about a stock someone knows very well isn’t an issue, the extent of the focus is a red flag. Since presenting Geo Group Citron has made 24 tweets, with 21 of them being about Geo group. This is a common pattern seen amongst pump accounts for various pump and dumps such as ALPP, NWBO, ENVX and GTII as the pumpers attempt to keep attention and focus on their companies. To be clear I’m not saying that Citron’s thesis on Geo is wrong, I don’t have an opinion on the stock. However, that level of focus isn’t normal for someone just attempting to draw attention to their thesis, and suggests an attempt to move the price in a ‘pumpy’ manner.
Finally, I would love to analyse Citron’s pitches for Innoviz and Wish however unfortunately they have deleted all of their tweets about Wish and all but one of their Innoviz tweets. This brings us onto our next point, accountability. Everybody gets things wrong, what gives you an insight into people’s character and intentions is how they respond to their mistakes. When a stock pitch goes wrong a good faith actor comes out and owns up to it, self reflects and identifies what went wrong. If they potentially led others into the investment the right thing to do is apologise. A classic identifier of a stock pumper is ignoring or writing off mistakes. For some it’s the evil shorties fault, for some they “got out at the top” and some just pretend their calls never existed or even go as far to delete them. Wish is now down 80% from where they recommended it while Innoviz is down 50% after announcing a capital raise literally days after Citron recommended them. Citron’s theses for both these companies were dead wrong, they published them to their 350000 followers and sent both stocks shooting up before collapsing. Andrew has not displayed an ounce of regret or accountability for any of it, instead just moving on to the next “pitch” in Geo Group. In my opinion this is morally questionable behaviour and should hurt Citron’s credibility as a ‘research’ firm.
Andrew has spent much of his career railing against the bad actors on wall st. Ironically, based on Citron’s recent actions it seems he has become the exact thing he swore to defend against. Citron has been displaying multiple behaviours that I believe are more characteristic of a stock pump than an actual stock pitch and people should be wary of any “research” being put out by them. In a broader view, I believe these behaviours should be considered red flags in any financial ‘influencer’ and should invite caution. Look for people who are balanced, unbiased and accountable, and most importantly acting in good faith.