MONTREAL — Ben Axler, who bets on companies to fail, thinks Canadian analysts who cover Canadian companies are too prone to patriotism and too quick to cheerlead. “Every time I look at a Canadian company and read the reports from Canada, it’s always, ‘This Canadian company is the best in the world at what it does,’” he told me over the phone from New York City last week. “And that’s fine. But certainly, as these companies go into the U.S., they become a little more global, and we don’t always necessarily think they’re the best company in the entire world.”

It’s why Axler and his team at Spruce Point Capital looked past the overwhelmingly positive predictions about Montreal-based e-commerce company Lightspeed and placed the rough equivalent of a stink bid. Though the company’s share price had climbed to nearly a nine-fold high since going public in 2019, in September of this year Axler’s company published a report calling it an “inferior business” that “appears overvalued on both revenue and gross profit metrics” and “does not justify the current lofty valuation.”

Unlike the majority of analysts who cover Lightspeed, Axler sniffed the numbers and smelled rot—or, at the very least, a business opportunity. Spruce Point alleged that Lightspeed changed on its website its gross transaction volume by over US$2 billion within a year, inflated its customer base by nearly 100 per cent or more, papered over its sluggish growth with expensive and largely failing acquisitions and has otherwise “not been transparent about competitive pressures and material margin decline.” 

In case readers didn’t get the point, the cover of the 125-page report is illustrated with a rat scurrying underneath a crude rendering of a Lightspeed point-of-sale terminal. (Axler says he designs the photo illustrations in Spruce Point reports himself, and they almost always feature the rodents.)

Axler shorted the stock, meaning he bet it would go down in price, then loudly and repeatedly suggested other investors do the same. And down it went, first in the wake of the report and then again following the Nov. 4 release of the company’s second-quarter earnings—which, though they beat analysts’ estimates for both revenue and adjusted loss for the quarter, offered conservative guidance about the company’s prospects for the quarters ahead, given the state of the world’s supply chains and a COVID-19 pandemic about to grind into its third calendar year. 

The market’s reaction that morning may have been more a response to the company’s outlook than anything Spruce Point wrote. Nevertheless, as the stock started to move you could find Axler on Twitter, doing a little touchdown dance. “This [is] where all the bashers and hate mail I received isn’t replaced with a ‘thanks for the warning,’” he wrote.

 

When I reached him on the phone last week, Lightspeed president Jean Paul Chauvet was reluctant to address the Spruce Point report at all—“I don’t want to give them more airspace than they deserve,” he said—but was nonetheless quick to call the allegations “wrong and misstated.” He also pointed out that Lightspeed has never once missed a forecast in the 12 quarters that the company has been public.

Chauvet’s reaction—reticence, then vehement denial—is a typical corporate reaction to Spruce Point, and it speaks to the Catch-22 short sellers inflict on their targets. A company can come off as less-than-transparent if it ignores a short’s allegations. But if it addresses them, it gives the allegations more oxygen.

It also speaks to the vulture-like existence of short sellers, as well as the rank chutzpah behind their craft: tell the world you make money by making stocks tank, tank a stock, repeat. Spruce Point, which has all of three staff including Axler, has repeated this exercise over 80 times, including with eight Canadian companies, since the firm’s founding in 2009. Lightspeed is one of several companies where short-selling activity has increased as of late, including Lion Electric, Peak Fintech Group, Goodfood Market and Air Canada, among others. 

Short sellers’ wretched reputation extends to governments. During the financial crisis of 2008, the U.S. Securities and Exchange Commission and the U.K. Financial Services Authority banned short-selling the stocks of 799 financial institutions, saying the practice was effectively prolonging everyone’s misery. The Malaysian government once proposed caning short sellers. 

Yet heroes in the sector, while few, are iconic. Consider James Chanos, who in 2001 shorted energy company Enron. Or Steve Eisman, who bet against the U.S. housing market before it crashed in 2008. Both got rich by going against the grain, thereby exposing fraud and bloat in the system. It’s another irksome truth about short sellers: when they’re right, their stories are the compelling stuff of books and movies.

Of course, things can also end badly. In 2017, Shopify CEO Tobi Lütke called Andrew Left, executive editor of U.S. short seller Citron, “a short-selling troll” after Citron issued a report saying the Ottawa-based e-commerce peddler had exaggerated its customer base. Though Shopify’s stock dipped, it has since amply recovered—certainly more than enough to win a $200,000 bet with Citron, which ceased offering short-seller advice early this year. 

Axler wouldn’t disclose the size of Spruce Point’s short position in Lightspeed, though he did say it has held onto its positions, at least through last Wednesday, as he expects the stock to go even lower. There are currently about 3.2 million shorted Lightspeed stocks—up from about 2.5 million when Spruce Point’s report came out—worth about US$318 million, according to MarketBeat research. “And we’re not done with Canada, so stay tuned,” Axler told me. (Rest easy, Shopify shareholders: Axler calls the company “a high-quality business.”)

Chauvet says he isn’t particularly worried about Spruce Point or other short sellers. In a perverse way, he says Spruce Point’s attention is an indication that Lightspeed and other Canadian companies are big enough to be worthy of the attention. “Canada has entrepreneurs that want to build international companies that want to go public. This is the short seller’s business model, so I think those rewards come with certain difficulties.”

To be sure, Spruce Point’s record in picking losers isn’t anywhere near perfect. In 2014, the company issued a report on iRobot, calling the autonomous-vacuum maker “the poster boy for a robotics bubble” and saying the stock would fall to US$20 to US$25 a share. It never went that low, even though Spruce Point has since issued five updates on the company predicting its demise. Today, the stock hovers at around US$90. 

It’s a similar story on this side of the border. Consider Spruce Point’s shellacking of Canadian Tire in late 2019, which decried the chain’s “antiquated” business model, cluttered stores, weak social media presence, low margins and inability to compete with the likes of Costco and Walmart, let alone Amazon. Axler wasn’t alone. Noted short seller Eisman also heaped scorn on the storied Canadian chain. 

As it did with Lightspeed, Spruce Point chided Canadian analysts for cheerleading the stock, and saying Canadian Tire stock had a 35 to 50 per cent downside risk. Yet the market didn’t agree. Instead, the stock bounded along unaffected, and while it suffered during the COVID-19 retail apocalypse it has since roared back, and is today trading at about $180. 

When I asked Axler about this, he blamed “irrational valuation expansion” and “central banks trying to be overly accommodative in supporting businesses in this unusual time” for Canadian Tire’s impressive stock performance.

It’s another irksome thing about short sellers: they aren’t happy when things go well.