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Generac (NYSE:GNRC), an S&P 500-listed company that makes generators and other power generation equipment, was the target of a report by a widely followed short seller, Spruce Point, on Wednesday.
Short selling is a strategy that profits from a decline in an asset price, and short-sellers like Spruce Point oftentimes spend weeks or months investigating a company before releasing a report, hoping to profit from the downside as market participants reprice assets based on the new information.
In the case of Generac, Spruce Point said it estimates 40% – 50% downside risk as Generac’s financial situation deteriorates and lofty analyst expectations are missed.
Major short reports targeting S&P 500-listed companies are rare, as companies listed in the index are among the most widely owned and analyst coverage is extensive. For example, at least nineteen Wall Street analysts have a “Buy” rating on Generac.
Spruce Point said shares of Generac are “materially overvalued,” as it struggles to suppress core business challenges while pivoting towards a highly speculative and unproven acquisition spree in clean energy products and services.
“…Generac was an extreme COVID-19 beneficiary from the stay and work-at-home effect, and committed to material capacity expansion which will be a drag going forward as demand tapers,” wrote Spruce Point. “Furthermore, we find recent evidence that Generac fails to discuss that its core portable generator business is under extreme pressure with it having to cut prices by nearly 20% to compete against an onslaught of new foreign competition.”
The report highlights alleged “shady transactions” and other issues plaguing the energy company.
Spruce Point concluded, “We believe Generac trades at an undeserved premium to peers and analysts give it premature credit as a proven player in clean energy. After heavily promoting its recent clean energy acquisitions, Generac recently guided down margins and blamed it on, ‘the start-up nature’ of the acquisitions. Buyer beware: on average, Generac’s acquisitions were founded nearly 15 years ago.”
The critical report was issued early Wednesday morning and Generac has yet to issue a response.
Shares were down 3%.
