Kathleen Gallagher: Short seller Spruce Point targets Generac with shoddy report

Spruce Point Capital Management’s attack on Generac couldn’t have painted a worse picture of the Waukesha maker of energy technology and other power products.

The New York short selling firm’s June news release said Generac is cutting prices, making questionable acquisitions, investing in companies with deceptive business practices, and partnering with distributors who are misleading customers. Oh, and one more thing. Generac’s Aaron Jagdfeld -- the CEO who led the company to stock returns of 100% plus in 2019 and 2020 and more than 50% in 2021 -- is unfit to lead and should resign.

Spruce Point has attacked eight companies this year, including healthcare apparel maker FIGS, footwear maker Skechers, and medical technologies maker Stryker. It’s interesting to compare what they make - especially compared with what Spruce Point makes, which is trouble and money for itself.

The contrast between Spruce Point and the companies it attacks underlines the dysfunctional and unsustainable business landscape we’re stuck with after decades of focusing on the wrong thing -- financial engineering rather than company building.

Look at Spruce Point. Ben Axler, its founder, graduated Summa Cum Laude from Rutgers and got a master’s degree in statistics from Yale. He started at Barclay’s and Credit Suisse and is now a self-styled “forensic detective,” publishing massive reports aimed at driving down the stock prices of companies he’s selling short so he can make money.

If that seems self-serving, well, it is. There may also be a bigger problem. Spruce Point’s tactics are being scrutinized by the U.S. Department of Justice, according to a B2: The Business of Business article. That scrutiny is part of a massive DOJ investigation into short selling practices at nearly 30 firms, Bloomberg has reported.

Generac continues to grow

Then there’s Generac. It became a Wall Street darling in the last few years, and from everything I can tell, has stuck to its business. And is still growing.

Generac built its success by making highly reliable back-up generators for mission critical applications that could not afford power outages, like data centers and hospitals. But that’s not the real excitement.

Generac is poised to disrupt the entire utility industry with distributed power management and control systems that will give energy independence to millions of households and small businesses. The promise is a technological pivot into an Electricity 2.0 world that could eventually topple the largest centralized power companies.

While Axler is writing long reports and piling on, Generac CEO Jagdfeld is overseeing the shipment of generators and other real products to storm-hit areas like Florida in September and New Orleans in August 2021.

Jagdfeld, by the way, didn’t go to fancy schools. He got an accounting degree at University of Wisconsin-Whitewater, became an auditor at Deloitte & Touche, then got a job in Generac’s accounting department and worked his way up to the top.

Spruce Point starts its 145-page Generac report by bragging about its “successful outcomes” -- which include one company going bankrupt and another seeing its share price cut in half.

Then it slings dirt, and anything remotely resembling it. Some of it borders on laughable. One “accusation”: Generac said 10 years ago that sales to homebuilders were an attractive opportunity. Jagdfeld has now told analysts those sales hadn’t been as successful as the company had hoped. Ummm. So?

Or how about this. Spruce Point says Jagdfeld should “be replaced by a more seasoned executive.” Why? Because Generac’s board has said his expertise isn’t in M&A and clean energy markets, where Generac is making acquisitions.

Honestly, Spruce Point’s report reads like a shoddy investigative story. Like someone searching for a message dug up anything they could find and strung it together. I wonder if Spruce Point keeps a list of nasties -- shady, highly suspicious, buzzkill, “trust me” narratives, massive stock promotion -- to pick and choose from as they write reports.

Reports published on 12 companies in 2021

Spruce Point in 2021 published reports about 12 different companies, the most of any active, “top-performing” short seller, according to an Institutional Investor article.

I’m not saying everything in Spruce Point’s report is wrong. Axler correctly identifies Tesla, with its home energy products, as a Generac competitor. And he sees Generac’s strategy of using revenue from older business lines to make clean energy acquisitions. But he repeatedly jumps from fact to speculation and innuendo.

Consequently, Axler’s biggest fans appear to be class action-chasing law firms like Pomerantz LP, that like clockwork follow short sellers’ reports with news releases proclaiming they are “investigating claims on behalf of investors.”

Let’s face it. Spruce Point is part of a bigger gang of stock speculators who prey on operating companies to achieve gains without any real work. The same brainiacs who from 2003 to 2007 used statistics to “prove” mortgaged back bonds and derivatives were extremely low risk. Yeah right.

Apologists and some legitimate economists justify short sellers as necessary to keep the market honest. You’ve got to love that logic. In the modern world of 24/7 flash trading, derivatives, hedge funds, SPACs, private equity and gigantic IPOs, the notion of an honest stock market seems like an oxymoron.

The best that can be said is that the modern market is a system of balanced dishonesty that has surprisingly little to do with the underlying economy.

Rivian, the electric truck maker, is down more than 50% from last year’s IPO price. That doesn’t mean it’s a bad company or electric vehicles are just a fad. It means the excessive liquidity (over $8 trillion since 2008) that the Federal Reserve injected into the system has separated the stock market from the economy. At low or negative interest rates, any valuation can be rationalized.

Are there risks to Generac stock? Of course.

But Spruce Point’s report is the epitome of quantity over quality. It’s mostly nonsense that should embarrass Axler.

Spruce Point said on June 22 that Generac’s stock would drop 40% to 50%. It’s down about 35% because of Fed tightening and likely to keep falling as interest rates rise.

Maybe with Generac the real economy will win this time.

Kathleen Gallagher was a business reporter at the Milwaukee Journal Sentinel and the Milwaukee Sentinel for 23 years. She was one of two reporters on the team that won a 2011 Pulitzer Prize for the One in a Billion series. Gallagher is now executive director of 5 Lakes Institute, a nonprofit working to grow the Great Lakes region's high technology entrepreneurial economy and culture. She can be reached at Kathleen@5lakesinstitute.org.

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This article originally appeared on Milwaukee Journal Sentinel: Kathleen Gallagher: Short seller targets Generac with baseless claims