Greenberg: CBI's 'The Shorts are Conflicted' Strategy
SAN DIEGO (TheStreet) -- Disclosure: I've done zero work, and have no intentions to do any work, on Chicago Bridge & Iron (CBI - Get Report), which was the focus of an accounting takedown by Prescience Point Research Group.
But I do have a take on CBI's response -- and I wouldn't be saying anything if it wasn't for the nature of its response.
Not this part:
CB&I has reviewed the report and strongly disagrees with its assumptions and conclusions.
But this part:
Notably, the report warns readers to assume that the short-selling firm and/or its affiliates hold short positions in CB&I common stock and that they stand to realize significant gains in the event that CB&I's stock price declines. CB&I believes that this conflict of interest should cause the report and its conclusions to be viewed skeptically.
To which I say: Of course they're conflicted -- but no more or less conflicted than somebody own owns the stock. Prescience Point, which says it spoke with the company twice during its research, discloses that it's short at the top of its report.
This ridiculous concept of trying to deflect critical commentary because the author is short is feeble, amateurish and, well, absurd, unless the company also criticizes bullish reports by analysts who it believes are conflicted because they own the stock.
Reality: Everybody, if they own or short a stock, is conflicted. Everybody talks their book. That's Wall Street.
The trick is trying to figure out who really knows what they're talking about. And even then, even if they do, it doesn't mean they'll be right -- and certainly not always right and certainly not always right in the typical momentum-driven trading cycle in which we now live.
When a company is the focus of critical reports, the best response, as time-consuming as it may be, is to issue a detailed -- or at least thoughtful -- response that explains, issue by issue, why the company believes the report is wrong. (Not that detailed responses guarantee anything: Just go back and look at the history of Sino-Forest and its responses after it was the focus of a damning report by then-relatively unknown Muddy Waters Research. Sino-Forest has since filed for bankruptcy.)
Anything short of even an attempted detailed response is the "just trust us" defense and I learned long ago that "just trust us" can be three of the most dangerous words in investing.
P.S.: Ken Hackel, of CT Capital, who wrote the book, "Security Valuation and Risk Analysis" -- and who also does detailed accounting work, and goes long and short stocks -- sent out a note this morning that said:
CBI was a stock we recommended until last fall and are familiar with its accounting. The stock more than doubled for us.
I believe the short seller does not have a clear understanding of CBI's 'contract capital' account which does indeed fluctuate greatly and is related to the need for working capital (as well as payments) on projects. Large projects are especially vulnerable.
I don't always agree with Ken, but he does know his accounting and I have a history with him being significantly more right than wrong. Then there's Warren Buffett's Berkshire Hathaway (BRK.A - Get Report), which owns 8.8% of CBI's shares, bought last year.
That leaves the allegation by a pretty much unknown firm like Prescience Point as easy to dismiss. But far from being a hit-and-run report, it's 38 pages of detailed analysis that, in the very least, CBI investors should use to double-up on their own research.
Just because nobody has ever heard of Prescience Point doesn't mean its allegations should be dismissed out of hand -- certainly no more than Muddy Waters' should have been on Sino-Forest, whose investors were some of the biggest and brightest.
That's the thing about Wall Street: Big and bright doesn't always mean right. Can't wait to see how this one turns out.
-- Written by Herb Greenberg in San Diego