When the Bears Come Calling: Six Ways to Protect Yourself from "Bear Raids"
In times of market volatility, companies, particularly small cap companies, can be victimized by a “bear raid.” A bear raid is a concerted effort by a group of traders to drive down the price of a stock by selling shares short and buying them back later, hopefully for a handsome profit.
Bear raids are believed have originated during the 1920s when the rules and regulations were not as stringent as they are today. Known “players” such as Jesse Livermore and Joseph Kennedy would collude and spread rumors to drive down stock prices. Today, the bears have many more tools available to them owing to the power of the Internet.
How do you know when your company is under attack? Some telltale signs to watch for:
- A proliferation of unsubstantiated negative rumors flooding message boards,
blogs, and the news media
- Negative research reports penned by unknown entities begin showing up on investor sites
- An increase in the short position
- Valuations that may not be in line with peer companies
Sometimes, the bears get it right (remember it was argued that the demise of Lehman Bros. and Bear Stearns was exacerbated by bear raids). While those firms may have deserved to fail, there are countless numbers of companies that for one reason or another find themselves being confronted by a bear raid and the needless loss of market value. What to do?
- Monitor everything – Sounds difficult and time consuming, but if you think your company is vulnerable, you need to stay abreast of what is being said and who is saying it. Popular message boards remain hotbeds for rumors and misinformation. Of course, the power of the blogosphere cannot be denied and a company’s reputation can come under attack in a matter of minutes. There are tools around to monitor what is being said. Unchecked rumor and speculation can become “institutionalized” and promulgated by the mainstream media.
- Keep your enemies closer – While many bears operate in the shadows, sooner or later, you will become aware of the negative interests. They’ll manifest themselves in public forums (investor meetings, conference calls, etc.) by making negative comments or posing questions skeptical in tone about the company’s products, technology or financial condition. Learn as much as you can about these people as they do tend to run in packs (your company’s outside legal counsel should be brought in to monitor the situation as well as uncover details about such investors).
- Fight fiction with facts – Rumors cannot be allowed to stand. As noted earlier, rumors have a way of becoming accepted as fact if left unchecked. You need to be vigilant and have the facts at the ready should you be confronted by rumors and be prepared to respond in the appropriate forums. In addition to regular updates via press releases and media interviews, host an analyst day and have all relevant personnel on hand to discuss various aspects of the company. This is particularly important for technology and biotechnology companies and those companies still in the research stage. The event should be webcast and the media invited to attend.
- Enlist allies – Be in a position to point the media to authorities and experts favorable to your cause. The obvious choices are the company’s covering sell-side analysts. However, there may be others such as academics who have published on your company’s science or technology who might be useful. Be advised that the media will seek commentary from the naysayers as well.
- Bolster credibility – Often you will see companies add industry heavyweights or prominent executives to their boards of directors. While some will view this as a sound practice, others may take the view that such moves are window-dressing in a vain attempt to mask a failing story.
- Call the regulators – If you suspect a bear raid, by all means contact the appropriate exchange. Have all the facts and evidence available. They will investigate the matter.
Be advised that once those orchestrating a bear raid sink their claws into a company, they tend to hang on and not give up easily. The key to successfully combating a bear raid is to be vigilant and have a plan in place backed by the facts. Most of all your management needs to be ready to defend the company’s position quickly and in a forthright manner. In closing I offer a biblical reference: “And ye shall know the truth, and the truth will set you free” (John 8:32).