Don't Let Citron Research Sour You on Plug Power

NEW YORK (TheStreet) -- Plug Power (PLUG) is gaining today, and for good reason.

Citron Research, a short seller that has made a name for itself uncovering Chinese stock frauds, set its sights directly on Plug Power earlier this week, creating an avalanche of selling that culminated in the Latham, New York-based maker of alternative energy technologies losing 40% of its market capitalization in a single session.

That's called moving the market.

On Tuesday, I warned investors not to get caught up in the emotion of Plug Power or similar alternative energy companies, Fuelcell Energy  (FCEL) and Ballard Power Systems (BLDP). But speculators grabbed those stocks anyway.

Plug Power's rapid decline was prompted by a negative report and televised comments from Andrew Left, Citron Research's founder, and a man not unaccustomed to controversy. Left has a history of becoming the news as much as the stock in question.

According to the National Futures Association, Left was sanctioned for "false and misleading statements to cheat, defraud or deceive a customer in violation of NFA compliance rules 2-2(a) and 2-29(a)(1). Left's conduct was inconsistent with just and equitable principles of trade."

As a consequence, the NFA panel "barred Left from association with and from acting as a principal of any NFA member for three years; ordered him to take an ethics training course; and placed restrictions on his activities for two years which prevent him from supervising any AP and require him to tape record and log all conversations with current and potential customers."

You may not have been aware of that information when Left appeared on Comcast's (CMCSA) CNBC on Tuesday to talk about Plug Power. The network apparently decided it was reasonable to allow Left to state his case without another guest challenging his claims. the result was a turkey shoot.

PLUG Revenue (TTM) Chart

It's not unusual for the market to quickly brush off a negative Citron Research report and continue higher. I know this from firsthand experience. After shorting falling stocks in the immediate aftermath of negative reports and watching my short reverse back higher too many times, I've learned to remain skeptical about Left's research.

Citron has shot down stocks many times before. And it's been wrong on more than one occasion.

On Feb. 14, 2013, Citron Research issued a report about 3D Systems (DDD) and tweeted it during the above price bar with a blue circle claiming, "Anyone who is looking at this stock over $30 a share is obviously bullish on the next five years of hype, and less concerned about the details like accounting methods."

For a brief time, 3D Systems shares dipped below $30. You know what that turned out to be? A buying opportunity, that's what. Because following the dip, 3D Systems more than tripled and came close to surpassing $100 before the end of the year. It zoomed over 50% higher now than when the report was issued.


Another example came on June 12, 2013, with the consumer-services platform Angie's List (ANGI).  But 20 minutes after the report was tweeted by Citron Research, the shares were trading higher.

Angie's List has fallen since, but it's obvious that the initial reaction was a knee-jerk shakeout of weak hands. There are other examples, and as a full-time trader I witness most of them. Citron rightfully made a name for itself exposing Chinese frauds but its record with American stocks isn't as impressive.

For instance, Tesla Motors (TSLA). On July 30, 2013, the electric-car manufacturer was trading near $136 when Citron announced a short position on the stock. Initially shares dropped, falling almost $10. Yet two days later, the shares had fully recovered and Citron was underwater in its short position.

About a week later, on Aug. 8, Citron announced it added to its short position at a time when shares were about $157, $21 higher than the entry announcement. Once again the shares fell, but by Aug. 23 the shares moved above $160.

Defending its position, Citron Research stated:

"So when Tesla floated its secondary in May at $92/share, Musk was giving a sign. At that price, he thought he was being ambitious to raise over $3 billion at that price per share."

Compare that to Citron's comments on Plug Power on Tuesday:

"The company sold another $22.4 million worth of stock at 15% discount to prior day closing price ($5.75). Even Marsh himself could not ever dream this stock would ever get over $5."

Citron Research makes a point to advise readers that Plug Power's CEO Andrew Marsh wouldn't even buy shares at 15 cents, and management didn't participate in any of the capital raises. However, while perhaps technically correct, it's disingenuous to omit Marsh's purchases shortly after the last two capital raises. Marsh bought over $45,000 worth of stock in two transactions during 2013 according to SEC filings.

Insiders and institutions own over 30% of the shares, a significant percentage considering how many funds won't own stocks under $5, and the company doesn't pay a dividend.

According to Citron Research, the only people claiming these stocks can go higher are the CEOs. Over a dozen investment funds think otherwise.

On Sept. 25, Citron fired another shot at Tesla's bulls when the automaker was trading near $180. By this time, the market discounted the renewed cries of wolf and Tesla closed near the highs of the day, followed by three days of higher closes. A few days later Citron sent the following tweet:

So what is Citron Research? Is it an online newspaper similar to,, or No, not by a longshot.

If you want to make money in the market, writing hit pieces -- doom and gloom stories about a company -- is probably the fastest and most effective means to do so. "Stocks take the stairs on the way up, and the elevator on the way down" is a common Wall Street phrase. Negative news creates much greater emotional reaction than positive.

That doesn't mean Citron Research is unwilling to produce a bullish opinions. On Jan. 17, 2014 Citron announced the shorts had it wrong with BlackBerry (BBRY) when shares were trading around $8.85. Volume spiked and initially BlackBerry shot higher, breaking above $9 briefly. In less than 30 minutes, though, the price had fully retraced before moving higher to close higher.

By the beginning of February, BlackBerry was once again trading near $8.90 a share. I should note that I also believe BlackBerry has room to run higher and I agreed with Citron's assessment, but this illustrates the point that Citron's crystal ball can be hazy.

Citron Research finds stocks it argues are overbought, then shorts the stock and writes a convincing opinion of why the market has it wrong, hoping investors will act on their thesis. Then they cover the short position, hoping for a profit. 

That seems to be its business model: short, create fear and cover. They appear to do it exceptionally well. Short sellers do serve a valuable purpose in creating an efficient market, no argument there. Citron Research charges that Plug Power management wouldn't buy shares at 15 cents, but I'm willing to bet Citron Research won't wait until the shares are at 50 cents before covering.

Remember, 50 cents is what Citron Research claims the stock is worth, but it would be surprising to learn many of the short sellers haven't fully covered already. There's no way shorts will wait until 50 cents before starting to cover. Not with Wal-Mart (WMT) placing a large order. It was the Wal-Mart order that fueled the stock's recent surge.

Other customers include Kroger (KR), Procter & Gamble (PG), FedEx (FDX), Coca-Cola (KO), Sysco (SYY), and Mercedes Benz. Wal-Mart's expansion demonstrates an acceleration in sales, not a one-off event unlikely to happen again.

I don't enjoy volatility any more than the next investor. If you're considering dipping your big toe into Plug Power, you may want to consider selling a covered call. A covered call is buying the stock and selling a call option. Covered calls limit the amount of profit, but the premium is sky high as a result of the recent extreme moves in front of earnings.

I sold covered calls near Tuesday's close for an average net cost basis of $5.60. At $11, I thought the price was rich, but for about $6, I'll join institutional holders including Robert W. Baird, Renaissance Technologies and other large funds.

Plug Power was rising 5.1% in mid-day trading to $6.34. The shares have gained 309% in 2014.

At the time of publication, the author was long Plug Power but held no positions in any of the other stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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