Whenever short sellers such as Hindenburg Research publish their findings, they create waves in the market. For investors, the main question is: how are you going to distinguish that such statements are accurate or they are simply a result of speculations?
The first is to read through the evidence presented with considerable attention. Most short seller reports use regulation filings, financial reports, or any other public records in support of its allegation.
For instance, the Hindenburg research report on the Adani Group stated that it took two years to conduct research with documents that are available to the public. However, as an investor you need to notice if a report uses sources that are anonymous or assumptions since such claims may not be valid.
After that, one has to examine the background of the short seller. Some, like Hindenburg, have uncovered massive scams — do you remember Nikola, whose report resulted in criminal charges against the company’s founder? But success is not always guaranteed, sources reveal that less than half of the short-seller reports actually lead to sustained decline in the stock.
Stock prices can start dropping in the first place, like Adani Group which saw its market value erode $150 billion after the Hindenburg report. Still, several of the Adani stocks rebounded dramatically, showing that first impressions may not always be accurate, and may even be exaggerated in this case.
Finally, look at the management’s action and the legal decision made on the firm. A robust denial with factual evidence, as Adani did recently by filing a 413-page reply to Hindenburg’s report, is as good as a signal of robustness. Besides, regulatory action like SEBI’s investigation into the Adani allegations brings authenticity to the overall process.
As you can see, the investors should stay vigilant as well because the short sellers make money out of a falling stock price. However, their claims could be true and point to some real problems that need to be understood in combination with factors such as a company’s balance sheets, ratios, and sustainability in the long term. Investors should be aware of the release dates and prepare themselves accordingly but following the written word and keeping a perspective assists in decision making.