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Shares of Element Fleet Management Corp. were hammered on Wednesday amid investor speculation – which turned out to be wrong – that it might be the next target of well-known short seller Muddy Waters Research LLC.
Element stock dropped 38.6 per cent to $6.20 in early trading before being halted. It regained some of its losses, closing down 15 per cent to $8.56 on the Toronto Stock Exchange.
Muddy Waters, the activist short seller founded by Carson Block, said on Twitter early Wednesday that it was about to unveil its latest Canadian short. It turned out to be Asanko Gold Inc.
"Even the hint that EFN might be the target was enough to cause a massive sell-off," said one unnamed analyst, citing the company's stock symbol. "It just shows how fragile investor sentiment is around Canadian financials right now."
In a statement released just after 10:30 a.m. ET, provided at the request of the Investment Industry Regulatory Organization of Canada, Element said it was "not aware of any material, undisclosed information related to the company that would account for the recent decrease in the market price and level of trading volume of its common shares."
Element provides management services and financing for commercial vehicle and equipment fleets. It was created by the split last year of Element Financial Corp., which also established commercial finance company ECN Capital, led by CEO Steven Hudson.
In an e-mail to The Globe and Mail through its public relations firm, Muddy Waters said it had "no comment on Element as it didn't release any report on the topic." In a Bloomberg interview Wednesday, Mr. Block said Element was a stock he "had never heard of."
Investors may have speculated that Element was the target after its partner on a joint venture (JV), Celadon Group Inc., was the focus of a recent short-seller report by Prescience Point Research Group.
The report alleges Celadon "has used off-balance sheet entities (i.e., 19th Capital, JV with Element) and manipulative accounting practices to hide its insolvent condition from investors and creditors." 19th Capital is the heavy-duty truck fleet leasing joint venture with Celadon formed late last year.
Element's stock has also been slipping in recent weeks amid concerns about its growth, analysts said.
Wednesday's sell-off presents a buying opportunity for investors, said Vincent Caintic, an analyst at Stephens, who has a "buy" on the stock and $14 target.
Mr. Caintic said the business has been around for decades and he believes it's stable.
"I can't think of any stock of this calibre that is this cheap right now," he said. "This is a business that's very difficult to kill. … It survived the U.S. financial crisis not only intact but stronger. It's a very stable business, and it's surprising and disappointing that the stock is so volatile on a business that is so stable."
The analyst consensus price target for Element over the next year is $14.71. Among 13 analysts who cover the stock, seven have a "buy," five a "hold" and one a "sell."
Element addressed the concerns about the Celadon JV in an earnings call with analysts on May 10. It said the 19th Capital JV and Celadon are two separate entities. According to a transcript of the call, Element CEO Bradley Nullmeyer said: "We do not have any direct credit exposure to Celadon, as a user."
Element said it contributed a portfolio of just over $900-million to the JV for senior debt of approximately $800-million and a 49.9-per-cent interest. It has about $125-million of equity in the JV.
Analysts said the 19th Capital contribution is small relative to its $3.3-billion market capitalization and doesn't justify the huge sell-off on Wednesday.
In a note the day after the May 10 call, Raymond James analyst Brenna Phelan, who has a "strong buy" and $16 target on the stock, said the JV loss was higher than expected in the latest quarter "due to a challenging trucking environment."
She said Element has become more involved in the operational aspects of the JV "and is beginning to see improvement.
"Management clarified that even in a highly stressed operating environment, there is $250-million of equity in the JV to absorb any asset impairments before its senior debt would become impaired."
In a note released Tuesday, before the stock sell-off, CIBC World Markets analyst Paul Holden reiterated his "outperformer" recommendation on the stock and his $15 target price after the company announced it has issued $1.2-billion (U.S.) of term notes through Chesapeake Funding II LLC. The company said it was "the largest ABS [asset-based securities] issuance to date in the fleet-lease sector."
Mr. Holden said the size and pricing "were better than expected" and could be a "much-needed positive development for a stock that has sold off sharply in the last three months."