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Greenberg: Nu Skin's Lesson on Short Squeezes

By: Herb Greenberg | 01/17/14 - 10:24 AM EST

Stocks in this article: NUS

SAN DIEGO (TheStreet) -- Over the past year or two or three or -- gee, longer than I like to think -- there has been a tendency to get giddy over short squeezes. This is when stocks rise so quickly that shorts have no choice but to duck and cover.

As they buy the stocks they have borrowed, at higher prices, this causes stocks to rise with even more gusto.

Making money on the long side has never been so easy.

But there's a downside: When the shorts are gone, so are the natural buyers and as Nu Skin (NUS) showed in recent days stocks can fall in a vacuum. 

Which is all a long-winded way of pointing out how management that is obsessed with short-sellers should be careful of what they wish for.

Nu Skin, in particular, has gone out of its way to single-out short-sellers. In an earnings call in July 2012 the company's president, Truman Hunt, said:

"We're very optimistic about the future. On a personal note, when I sit in our conventions and when I see the level of energy and enthusiasm, I sit there and wonder how in the world anyone could short Nu Skin, and our job here at corporate headquarters is to make those people really nervous, and that's what we're going to do."

The stock actually meandered for eight months (sophisticated investors tend to see through, and often get nervous, when companies attack on critics) before nearly tripling. (That'll show those shorts).
 
Reality: What goes up fast, can go down faster. Companies that feel compelled to attack shorts have a history of somehow imploding. Great management tends to go about doing what it does best -- managing. If it does a good enough job, the market will follow.

P.S. The People's Daily, the communist party mouthpiece, was out with another piece on Nu Skin. Seems it wasn't happy with the company's claim that its original piece was "inaccurate and exaggerated." Moral of story: If a government-backed paper attacks you, don't fire back if your growth is tied to that country.

-- Written by Herb Greenberg in San Diego

Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security.

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