Investors Should Beware of Citron Research, Plug Power

NEW YORK (TheStreet) -- TheStreet's Robert Weinstein produced some of his best work ever Wednesday afternoon in Don't Let Citron Research Sour You on Plug Power.

It prompted me to recall two similar situations I injected myself into back in my Seeking Alpha days. Both provide valuable lessons on not filtering out red flags, particularly as you're entering emotional territory on the volatile stock of the day.

I'll review the aforementioned instances in a minute, but first ...

I have no position on or in Plug Power (PLUG); however, Weinstein's article resonated with me, primarily because it raised red flags investors need to consider with respect to every stock they buy or sell short. And, if you're dealing in smaller names, thinly-traded equities, penny stocks or battleground stocks, you need to not only consider red flags, but seek them out.

You have to scrutinize your original conviction -- what you think you know -- to the point where you aggressively take the other side. For some of us, it's not possible to effectively check ourselves. We cannot remove emotion -- and the damaging investor psychology it can create -- from the equation, so we have no business wading in risky territory.

I know this because back in my trading and investing days (TheStreet's editorial policy prohibits me, a full-time employee, from holding positions in individual stocks other than TheStreet (TST)), I got burned one too many times chasing any and all of the above. I learned -- the hard way -- to just stay away from the battleground and, if a group like Citron was involved, ignore the situation completely.

Of course, the principal at Citron, Andrew Left, wasn't happy with Weinstein's reporting. While I have no opinion on PLUG or the veracity of Citron's research, I do believe we need more people like Weinstein calling out people like Left, holding them accountable and making them answer the difficult questions.

As Robert wrote:

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.
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.

So, of course, Left wasn't happy. Weinstein published information -- that's available to any investor if they know where and take the time to look -- that lays out facts surrounding Left's history and Citron's track record. This data couldn't be more material to the situation surrounding PLUG, a situation triggered by Citron itself.

Left's angry response, which, as I understand it, came with the typical attendant threats doesn't surprise me. I've been there before. And, while the situations aren't necessarily analogous, they speak to one another in real ways. Additionally, they provide the lesson that we should not only scrutinize third-party research groups that take short (and, as Weinstein noted, sometimes long) positions, but we should scrutinize companies themselves.

In May of 2011 at Seeking Alpha, I wrote a pair of articles raising questions about a company called Green Automotive (GACR).

If I may say so myself, it's some of my best work. Much like Weinstein's efforts with respect to PLUG, I called out individuals with iffy, at best, track records. I also questioned the company's claims about its business and the unscrupulous ways it went about trying to sell its stock to unsuspecting investors.

Of course, the company responded with threats:

(Former GACR CEO) Mr. (Fred) Luke went on to say that recent criticism by a financial writer who represents to be closely following this newly developing Electric Vehicle industry, appears to me to be doing the subject matter and his readers a great disservice by not conducting any real due diligence, and therefore lacks the facts to substantiate his negative editorial comments ...
... For that matter this reporter could be collaborating with some of the short-sellers. Why else publish something which is full of negative mis-statements and a painfully incomplete analysis of all of the publicly-accessible news and other publicly-accessible facts, unless you really didn't care about doing a good job maintaining balance. I'll let the regulators the Company's attorneys pursue this as we have other, more important things to deal with related to the timely launch of the company's All-Electric SUV late this year?.

Here's a look at the GACR chart, from May 2011 to intraday trading Wednesday afternoon:

GACR ChartGACR data by YCharts

At the time, I lost money on another penny stock. One I was sure was going to do well. Emotion took over, clouded my better sense and cost me. Luckily, I was diversified in electric vehicle-related stocks at the time, so things turned out alright.

In the month prior, I raised red flags about bookkeeping and related matters at another company, Sino Clean Energy (SCEI).

Though I have lost track of the situation since, I do know that Sino Clean Energy, at the very least, commenced legal proceedings against Seeking Alpha and a contributor, Alfred Little, who picked up the SCEI story shortly after my article and did some of the best investigative work I had, at the time, ever seen.

Here's a look at the SCEI chart from April 2011 to Tuesday's close, courtesy of Yahoo! (YHOO) Finance:

And it seems the Chairman and CEO of Sino, Baowen Ren, who I wrote about in 2011, found himself in hot water late in 2013:

During the last three years and under his leadership, Management destroyed 98% of its shareholder value as the equity market value of the Company plunged from over $160 million to a current $4 million. This simply is an unacceptable performance for the Chairman of the Board and CEO. In the absence of Mr. Ren presenting a credible plan to restore and maximize value for all shareholders, the shareholders who are part of the Schedule 13D filing Group that I represent request the Board to terminate Mr Ren's employment with the Company immediately owing to this totally unacceptable performance.

I'm not sure what, if anything, came of that.

And, really, the specifics of these individual situations -- PLUG, GACR and SCEI -- don't matter much. It's the general lesson -- that rings loud and clear when you're not emotionally invested -- traders and investors ought to heed.

Personally, I want to get back to doing the type of work outlined in this article. When you think about it, why does the financial media even exist if it's hesitant -- for one reason or the other -- to be in the business of raising red flags?

--Written by Rocco Pendola in Santa Monica, Calif.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks. Rocco Pendola is a columnist for TheStreet. Whenever possible, Pendola uses hockey, Springsteen or Southern California references in his work. He lives in Santa Monica.

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