This week, LightSpeed POS (LSPD) was a targeted by an American short-selling investment firm who believes the stock price could drop as much as 80% due to inflated metrics. Spruce Capital Management claims LightSpeed has covered up massive, inflated figures of how many customers it has, how much money it makes from them, and how much growth potential it has on the table. At the same time, the investment firm has taken a short position on LSPD’s stock and stands to profit should their prediction come to life.

Taking Over the Narrative

Number one objective. Create as much fear as possible.

In order to build out their short selling strategy Spruce Capital published a wordy 125 PowerPoint slide deck online describing the potential 60-80% downside on LightSpeed’s stock price.

Lightspeed is not actually the first Canadian company that Spruce Point has targeted with a short position. In the past, the company went after Dollarama, Canadian Tire and waste management firm GFL, with varying degrees of success.

With so many investment strategies floating around this week, what exactly is short selling and why is it being used against LightSpeed?

What is Short Selling?

In short, (no pun intended), is when you borrow shares you don’t own and sell them immediately to obtain the proceeds. At a certain point, you will need to return these shares back to the borrower. The idea behind short selling is that the investor thinks the price of the stock will go down in the near future and after buying back the shares at a lower price, the investor can pocket the difference as a profit.

Why Short Sell?

Short selling is very common for stocks that have greatly appreciated in value within a short period of time. In the case of LSPD, we’re talking about a stock that is up 195.36% since September 30, 2020.

In real world execution, Spruce Capital Management thinks LSPD’s stock has hit a resistance point and that in the short term, there might not be any upside left for investors. This is where short sellers try to capture the moment by profiting from the potential decline.

The most interesting part of short selling is that investment firms such as Spruce Capital Management, are not required to own the stock to profit. This is where options come into the picture and completes the short selling strategy.

What Are Options?

An option is where the holder of the options contract has the right to buy or sell an underlying asset at a certain price within a specific amount of time. In order for any option to exist, 2 parties need to come into a contractual agreement meaning one party sells the contract at a premium or cost and the other party pays for the contract. In the case of LSPD, one party is betting the stock will not move or continue to appreciate and the other party believes otherwise.

What is this Week’s Takeaway?

Personally, I am not intimidated by short sellers like Spruce Capital, and I think in general, investors should not be intimidated by short sellers either. However, I believe it’s worth mentioning that short selling is what makes a market efficient. Short selling can help control high growth stocks from reach irrational valuations and is a key ingredient for risk management.

If you own LightSpeed stock, you could experience higher than normal volatility, possibility until the end of the year. Just my opinion and not a fact.

On the other hand, if you’re thinking about buying the price dips during this volatile period, your decision could be a smart move especially if LightSpeed can fight off the “non-believers”.

Have a great weekend!

Talk soon,

Michael Zagari, FCSI, CIM, CIWM