Carson Block, the prominent short seller and founder of Muddy Waters Capital LLC, targeted a Japanese firm for the first time with a negative report on motor-maker Nidec Corp.
Muddy Waters is short the Kyoto-based company and sees its stock falling as much as 52 percent from Monday’s close, it wrote in a 53-page short-biased report. Nidec consistently misses sales and profit targets and uses “highly aggressive accounting” to boost reported profitability, Muddy Waters wrote. A spokesman for Nidec said he had no immediate comment. Its shares dropped as much as 5.9 percent in morning trading Tuesday before paring declines.
“In our view this company is not well-governed,” Block said in a phone interview from San Francisco. “It uses acquisitions to try to cover up a lack of organic growth in its business.”
Muddy Waters is taking on one of Japan’s most iconic entrepreneurs in its first foray into the world’s third-largest economy. It becomes the latest activist short seller to enter the country in 2016, as an overhaul of corporate governance rules convinces bears their voices will be heard in a market seen as having previously escaped deeper scrutiny.
Short sellers borrow shares and sell them, hoping to profit by buying them back later at a lower price. Supporters say the research makes markets more efficient and keeps misbehaving corporate managers in check, while opponents argue the methods often resemble market manipulation.
Nidec is run by billionaire founder Shigenobu Nagamori, who started the business in a shed beside his mother’s farmhouse and built it into a $25 billion firm. Its shares, which have surged more than fourfold since 2012, traded at 31 times earnings at Monday’s close, compared with 20 times for the benchmark Topix index. That’s partly because of what has been called a “Nagamori premium.”
Block rose to fame with a series of short-selling campaigns against Chinese companies that traded in North America. The biggest was Sino-Forest Corp., the tree grower whose market value declined to nothing from more than $6 billion after Muddy Waters questioned its accounting.
Recent Muddy Waters bets have had mixed results. U.S. construction group Tutor Perini Corp. has risen 33 percent since Block revealed a short in October, while St. Jude Medical Inc. is down 2.1 percent since Muddy Waters questioned the security of its cardiac devices in August.
Some of the biggest names in activist short selling focused on Japanese companies for the first time this summer. Glaucus Research Group issued a bearish thesis on commodities trader Itochu Corp., while Citron Research said robot-exoskeleton maker Cyberdyne Inc. was poised to plunge. Both firms strongly denied the allegations made by the short sellers.
“We certainly want to make the case to Japan that there’s a place for short-side activists as well as long-side activists,” Block said.
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