Typically, when a stock drops into correction (-10% or more) territory in a single day there is a reason. Sometimes that reason is justified, other times not.
On Wednesday, September 30, Canadian stock Lightspeed Commerce (TSE:LSPD) which was one of the best performing TSX stocks of the year suffered an 11.74% drop. While this drop was downright jarring and left investors in shock, there is absolutely no reason to panic.
Targeted by short seller
Lightspeed’s correction was due to the company being targeted by a notable short seller – Spruce Point Capital. As with many short reports, the report itself is full of inaccuracies and features plenty of speculation and assumptions.
We won’t go into too many details of the report because quite frankly, despite being 125 pages in length, most of it is not worth a read. Notable short sellers like Spruce Point which prey on fear, do so by putting out large reports that cause confusion and seed doubt among retail investors.
These reports are always well timed, usually around quarter or year-end, and when companies are trading at high valuations, have seen some pretty big runups or trading at all time highs.
The good news for Lightspeed investors, there is absolutely no reason to panic. In fact, the pullback is likely a buying opportunity.
Weak short case for Lightspeed Commerce (TSE:LSPD)
The two main points of Spruce Point’s report revolves around feedback from an ex-employee and the fact that allowances for bad debt more than doubled. While it is a Lightspeed hit piece, at times it also reads as a Shopify love letter.
To support their narrative, they also refer to outdated data from 2015 and a random Twitter account with no more than a few hundred followers that Tweets only about Shopify. They also failed to acknowledge the pandemic, in which many companies increased their allowances for bad debt or provision for credit losses.
In of their 125-page report, you’ll find the following small statement:
This research presentation expresses our research opinions. You should assume that as of the publication date of any presentation, report or letter, Spruce Point Capital Management LLC (“SPCM”) (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our subscribers and clients has a short position in all stocks (and are long/short combinations of puts and calls on the stock) covered herein, including without limitation Lightspeed Commerce Inc. (“LSPD”) and therefore stand to realize significant gains in the event that the price declines. In addition, you should assume SPCM is long Shopify, Inc (“SHOP”) and may be long/short combinations of puts and calls on the stock that stands to benefit from an increase in SHOP’s share price.
As you can see, Spruce Point and its clients stand to materially benefit from their bearish view on Lightspeed and their bullish position on Shopify. This is quite simply a means for them to benefit from their current positions.
For those new to the market and learning how to buy stocks, it could be a pretty jarring experience. However, it is a tactic that is used often by these short sellers. We can talk at length about the ethical implications of such reports, but needless to say it teeters the line of market manipulation.
Poor track record of success
Spruce Point highlights its successful short positions at the front of the report. Interestingly, it points to similar short calls in 2013, 2015, 2017, and 2018 – nothing since. It also fails to mention just how often its wrong.
Case in point, over the past couple of years the company has put out similar reports on Canadian Tire (TSE:CTC.A), Dollarama (TSE:DOL), and GFL Environment (TSE:GFL), in which the stocks are up 33%, 54%, and 87% respectively since their reports were made public.
All this being said, the reason for Lightspeed’s drop was unjustified. It remains one of the best tech stocks in the country and is well positioned to reward investors for years to come.
However, I will acknowledge the fact that Lightspeed’s share price may have gotten a little bit ahead of itself. It was also just coming off being in overbought territory for almost a month. The stock was certainly due for a pullback, the short report just helped it along and created an excellent opportunity for investors.
Lightspeed wouldn't be the only stock to be impacted recently. Changes have been seen in other areas as well, lets look at two top Canadian stocks to buy during this correction.