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Short-sellers have agendas of their own, and investors should be weary of that before relying on any advice or suggestions from them. After all, if they are short-selling, that means they’re profiting from a stock plummeting in share price.
Yesterday, we saw Aphria Inc (TSX:APHA)(NYSE:APHA) crash by a whopping 30% solely on a report from a short-seller that called the company a “black hole.” Aphria has said the report is false and has tried to do damage control as it sees its stock price spiral downward.
The companies behind the report are said to be shorting Aphria stock and so they would stand to benefit from a drop in price. Even if the criticism of Aphria’s international acquisitions is warranted, the problem is that the report would be inherently biased from the very beginning.
Despite Aphria’s best efforts to put out the fire, including CEO Vic Neufeld and other executives buying shares on Monday, the stock continued to fall on Tuesday, dropping below $6 per share in early trading.
Year to date, Aphria has lost around 60% of its value and has reached a new 52-week low. With the stock going off a cliff like this, it might be a great move to actually consider picking up the stock. It may sound crazy, but consider the Shopify Inc (TSX:SHOP)(NYSE:SHOP) example.
Shopify has been hit by short-seller reports multiple times, and both times its stock dropped significantly in value. While there are some big differences in business models and growth rates, they were both hit hard by short-sellers.
I felt that the claims against Shopify were unwarranted, and I was surprised how easily investors could be misguided. I’m not sure if those that made the report were shorting Shopify, but if they did, they could have come away with some big profits.
However, Shopify’s stock wouldn’t stay down and would eventually climb back up to new all-time highs. Many would argue (myself included), that Shopify has a much stronger business and that it has a strong track record of growing sales over many years.
Aphria doesn’t have as strong a reputation to fall back on, but that doesn’t mean the stock can’t recover from this. Generally, when a stock drops in price and it’s not a result of an earnings miss or some adverse impact to its business, there’s usually a good chance that it’ll bounce back in price, as the sell-off isn’t a result of something the company did.
After all, no new information was released about Aphria on Monday that would have suggested the company is in trouble. Instead, it was only a questionable report that sent the stock sinking.
While I’m not bullish on Aphria or any other cannabis stock, a report from a short-seller is no reason to sell a stock. Investors need to do their own research and analysis before making an investment decision.
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Fool contributor David Jagielski has no position in any of the stocks mentioned. Shopify is a recommendation of Stock Advisor Canada.