For the second time in a week, a U.S. short-seller has launched an offensive against a large Canadian company, triggering a surge in pessimism and a deep stock sell-off.
On Monday, shares of DH Corp., the financial services firm formerly named Davis + Henderson, swiftly fell in response to a bearish call by a little-known U.S. hedge fund. Over two trading days, the stock fell by as much as 25 per cent as the company fought to dispel the allegations.
A similar frenzy has gripped Valeant Pharmaceuticals International Inc.'s stock over the past week, after a report called the Canadian-listed company a potential "pharmaceutical Enron."
The two episodes could set precedents for U.S. short-sellers willing to stalk ever bigger game, said Jason Donville, chief executive of Toronto-based Donville Kent Asset Management, which owns Valeant shares.
"To trigger a panic on a stock is now relatively easy. If they can just get the ball rolling, it can go a long way down," he said. "We've seen the playbook."
U.S. bets against the Canadian market first began to pile up a couple of years ago. The Great White Short, which refers to anti-Canada sentiment, motivated investors who hoped that a housing collapse would imperil the big Canadian banks. That sentiment has lingered, said David Rosenberg, chief economist with Gluskin Sheff + Associates Inc. "It's just become fashionable to be bearish anything Canada."
But the recent move against Valeant, and now DH, demonstrates a willingness and ability to weaken larger Canadian names with allegations that may strain credibility, Mr. Donville said.
That's not to say investors don't have legitimate concerns about Valeant, which has grown explosively through a debt-fuelled campaign of acquisitions, and which now faces investigation by U.S. regulators over drug pricing. But Citron Research went much further than other critics, alleging fraud and calling Valeant a "malignant tumour on the U.S. health-care system."
While offering little in the way of original research, Citron pegged the fair value of Valeant's stock at $50 (U.S.). "You can't throw that kind of stuff out there if you're an RBC analyst," Mr. Donville said. "The target price was meant to be inflammatory."
The day prior to the report's release, Valeant shares closed in New York at about $147. At the time the lowest target price of the analysts tracking the stock was $155. Even after the recent sell-off, the average target sits at $212.
The day the Citron report went public, Valeant's shares dropped by as much as 40 per cent from the previous day's close, temporarily wiping out $20-billion in shareholder value in a matter of hours. The stock has since bounced back to a Tuesday close of $109.54, which is still less than half its September high share price.
This week, another short-seller took on another Canadian large-cap stock – DH, which also happens to have recently accumulated debt to fund some big acquisitions. The report by Lawton Park Capital Management accuses DH of attempting to "obfuscate deteriorating performance with desperate M&A and accounting tricks."
The company is in the middle of a transition away from paper cheques, its traditional stronghold, toward lending and payment technology for financial institutions. DH has acquired two companies recently in service of that transition.
"We thought the moves they made in the last few years to diversify were very encouraging," said Bryden Teich, associate portfolio manager at Avenue Investment Management, which owns shares of DH.
But the company's heightened debt levels may have made it vulnerable to bearish sentiment, Mr. Teich said. The same goes for the stellar performance of DH's shares over the past four years.
The short-seller's assertion that the stock would more fairly trade at $23 (Canadian), however, is "kind of ridiculous," Mr. Teich said. In a note to clients on Tuesday, National Bank analyst Trevor Johnson said he sees "little evidence to corroborate the author's view that [DH] is facing near-term earnings headwinds."
But if the goal is to drive down share price, the report has done just that, Mr. Teich said. The stock rallied on Tuesday but is still well off last week's trading range. "It plants a seed of doubt."