US Small Caps: The 310% Battery Rally Citron Tried to Short

US Small Caps: The 310% Battery Rally Citron Research Tried to Short

One dollar and forty-two cents. That was the price at which FuelCell Energy was bought on January 30, 2014, and at the close of the count, it was trading at $3.26: a 129.58% gain. In the same batch, Plug Power had gone from $3.12 to $6.36, a 103.85% increase. Two names in the fuel cell sector that summarized the thesis of a portfolio of US small caps, built on instinct and daily monitoring, with an average return of +17.42% in its first public appearance.

The proposal was to select a dozen small and mid-cap US companies with track records, note the price at which each was 'quoted,' and check what the market held. There were triple-digit hits and there were corpses.

What peine to fuel cell stocks in 2014

The start of 2014 was a party for batteries and fuel cells. In just five sessions, Plug Power posted a +45.54%, FuelCell a +55.73%, Ballard a +41.90% and ZBB a +101.94%. In the cumulative total for the year since January 1, the figures were dizzying: Plug rose 310.32%, Ballard 235.31%, ZBB 133.71% and FuelCell 112.06%.

The story that many pointed to as the trigger was Tesla's future battery gigafactory, which infected the entire sector with optimism. The market bought the story without asking too many questions, and prices stretched far beyond any prudent technical reference.

The report that put a $0.50 price tag on Plug Power

Almost in parallel, Citron Research—a firm specializing in short positions with considerable audience—published a report labeling Plug Power a 'casino stock' and assigning it a target price of $0.50, one-tenth of what it was trading at. The reaction was immediate.

The technical reading of the plunge pointed to a double top: the stock had plummeted from $11.41 to $9.94 in a single session, closing at $10.31; the next day it tried to exceed those $11.41 in premarket, failed, and came crashing down. As long as the value exceeded the previous day's highs, this argument held, people stayed inside. When it stopped doing so, it unraveled.

Short sellers enter with targets of $6.50 and $2.75

Not everyone was long. Day trading operators admitted to having gone short on Plug and FuelCell, considering both moves 'overextended,' with targets of $6.50 and $2.75 respectively. The underlying reasoning was simple: large rises in very little time without solid backing weren't Apple, and when they fell, they fell like lead.

That day, US indices also helped the bearish party by turning negative. The portfolio crashed into its own euphoria.

Autohome, Manhattan Associates and the rest of the table

Not everything was fuel cells. The initial roster mixed a specialized retailer, a software company, Chinese Autohome, a shipping company, an insurer, and a railway manufacturer. The numbers were not homogeneous: alongside DLIA's +24.74% or Manhattan Associates' +16.32%, lived the -23.50% of insurer HCI, -16.09% of Autohome and -11.19% of the shipping company.

DLIA, a micro-cap, relied on the figure of its chief executive, from GAP and hired in June of the previous year, from whom it was expected that she would start to bear fruit. She presented fair results, without forecasts, and the stock dropped almost 9% in the after-hours market. In contrast, Manhattan Associates surprised with good results and a +4.87% after close, standing at $36.63.

From +17% to -16%: lemons and new bets

Growth went out of fashion and enthusiasm soured. Values that had brought joy became a burden, and several of those picked as promises—a biotech among them—subtracted instead of adding. The response was to rotate. On to something else, butterfly.

There entered new names: two Argentine banks, a thermal management company, and a Chinese internet services company that responded well, in addition to some US airlines and a couple of REITs to cover the dividend expense. Among the alternatives on the table appeared the dilemma between Tata Motors and Tesla, resolved—with doubts—in favor of the Indian manufacturer by its P/E and its growth.

The spreadsheet that changed the monitoring

Much of the work was pure elementary arithmetic. The solution came in the form of a cloud spreadsheet that pulls real-time quotes with the =GoogleFinance(TICKER) function: you place the value's symbol in a column and the sheet converts it to price, without needing to open the broker. It even allows converting currencies with =GoogleFinance(«CURRENCY:USDEUR»). The big catch: it only works with US stock exchange stocks and ETFs.

On paper, an unrivaled market. Where practically all relevant products we know or will know are produced, said the thesis, although physical manufacturing is offshore. Questioning it was considered staying out of the best opportunities on the planet.

And amidst so many acronyms, the noise. Someone appeared offering an OTC market stock trading at $0.0002 and promising a 1,000% 'easy' gain thanks to a marijuana business. The response was a roar of laughter. The rest of the portfolio was still waiting, between quarterly results and forecasts, to see if that initial +17.42% was an intuition or a coincidence.