What does a rat do when it smells some super-stinky cheese?
Apparently, it rips through it with its sharp teeth and ravenous hunger, especially if that rat is short seller Spruce Point Capital and the cheese is dairy giant Saputo, Inc.
“Spruce Point believes Saputo has an untenable cost structure in a thin-margin, low-to-no-growth industry,” it says near the beginning of its 147-page report claiming the company faces a failing international strategy, declining business and financial health, trouble paying its modest dividend and stagnation of the dairy industry around the developed world.
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“Spruce Point sees 40-60 percent downside in Saputo’s share price.”
A short seller is a speculator who bets against a company’s stock, usually by borrowing stock and then selling it, attempting to push the stock price down, then repurchasing the shares at a lower price, giving back the borrowed shares and locking in a profit. The use of derivatives can greatly increase the profitability of a successful short strategy.
A short-seller’s report like this, which begins with an image of rats sniffing at cheese, is not an attempt to provide even-handed analysis but is instead a focused argument against a company’s stock price, arguing that the stock price should be lower because of problems within the company.
Saputo, an international dairy processing giant headquartered in Montreal, dismissed the report and Spruce Point’s attack.
“Saputo confirms that Spruce Point Capital Management has never engaged with the company,” said Saputo in a statement.
“Saputo is of the opinion that the report is without merit and that it contains mischaracterizations and incorrect information, which are misleading and solely intended to benefit the author. The company remains focused on its Global Strategic Plan initiatives and driving sustainable, profitable growth for all its stakeholders.”
Spruce Point claims that Saputo’s international strategy is failing, with recent acquisitions in Australia and the United Kingdom struggling with production, market and financial troubles.
It said the company’s ability to fund its dividend is weakening as profitability declines.
It criticizes the company for what it claims is a lack of transparency in multiple areas.
Spruce Point believes the brand power that companies like Saputo used to have is eroding as consumers increasingly move to no-name labels.
Underlying all the problems is a Canadian, United States, U.K. and Australian dairy market that is declining in annual per capita milk consumption, the short-seller said. Saputo has tried to grow itself away from the stagnating Canadian market by buying small players in the U.S. and overseas, benefitting by integrating local and regional companies in its operations.
However, that game is ending as the dairy industry is now mostly consolidated and other competitors are making new acquisitions costly and rare, Spruce Point said.
If its attack is successful, Saputo’s share price will fall when investors worry the shares are overpriced and sell en masse.
Short sellers don’t always succeed. Institutional investors are capable of doing their own in-depth research and don’t easily panic. Retail investors don’t always freak out and sell when they read stories like the one that ran prominently in the Globe and Mail newspaper about Spruce Point’s attack.
Spruce Point has made a specialty of targeting what it believes are overpriced companies in the food processing industry.
It previously hit Oatly, the oat milk company that became a sensation in the late 2010s. Oatly ran into problems when it couldn’t provide enough product to companies like Starbucks, which had embraced it, and its share price suffered.
Companies generally fear and despise short sellers and their tactics. Even if a short seller’s arguments aren’t valid, the panic they can cause among shareholders can cause a slump in the company’s stock price. The company’s underlying business can be fine, but the financial implications of a suppressed stock value can be severe.
However, others believe short sellers are essential truth tellers in the marketplace, highlighting unforeseen problems within companies.
Immediately after the report was issued Saputo’s stock fell about 10 percent, but within a few days regained most of those losses.
Contact ed.white@producer.com
