How the game is played

After more than 20 years in this wacky world we have seen our fair share of shenanigans. We have seen first hand how stocks can be manipulated, how information is misconstrued and how there are times when companies willingly participate in this game for their own personal benefit. As with most things in our wacky world this is all about money but when it comes to investing it’s about one thing and one thing only, making it. Wether an investor is long or short they could care less who saves it or who spends it as long as they make it.

We are seeing this game being played at this very moment as investors in Dexcom may have noticed life hasn’t been all that blissful these past few days. Shares which were once trading near $150 have now fallen to $120 for no apparent reason except for the fact the company is the subject of a short attack. Just as reminder short-sellers make money when shares in a company DECREASE in effect they are betting against the company. Now Dexcom is not the first diabetes company to experience a short attack as way back in the day shares of Amylin and Polymedica also came under attack.

This recent assault on Dexcom has been induced by a company called Spruce Point Management. To be honest we know little of this group and just as honest we could care less who they are as we have been down this road many times. Yes we have read their report and no we don’t believe much of it but this is one of those times when liars figure and figures lie. Yes there are lots of pretty charts and graphs with lots of verbiage which seems designed to put the reader asleep so they won’t realize lots of this stuff really makes no sense.

There is no question in our mind the company has been planning this assault for some time and has performed a fair amount of due diligence. Having worked with short sellers in the past we know how diligent they are as they are betting against the grain. It’s well known that there is an upside bias on the street just think of the last time an analyst actually issued a SELL recommendation. We also have little doubt that Abbott was complicit, not the company itself, but an executive or management team member who feed information to Spruce and was well compensated for this help.

It’s also quite possible Spruce got help from the inside either from an ex-employee or current employee with an ax to grind. This really should shock no one as it happens all the time. Is it right, is it moral that my friends is well above our pay grade all we know is that it happens. This is also the reason why we have never invested in or held a position short or long in any company we write about. We understand that what we write can influence share value and never wanted anything to influence our writing. As Momma Kliff used to say integrity is something you earn, never give away for if you do you will never get it back.

Let’s be clear here we are not claiming Spruce is doing anything illegal we are merely explaining how the game is played. We have seen this many times don’t necessarily like it but have learned to deal with it. We are not necessarily defending Dexcom a company we do like very much rather informing stakeholders of what’s going on. We know lots of our readers followed our advice when shares dipped below $60 and bought in.

So a couple of points here:

1. When this attack will end we’re not sure but it will end.

2. How much damage will it do depends on how much help Spruce gets. Should other short sellers jump on the bandwagon shares could fall further. With no real help we suspect the damage is coming to an end.

3. Is this an entry point for investors who believe in Dexcom, if history is a guide we’d say yes. Each time Dexcom has been declared dead or given up on shares come roaring back.

4. Has our view on Dexcom or the CGM market changed – NO.

5. Is there a bright side here, actually yes, as it has made Dexcom a more attractive takeover target.

Just so there is no misunderstanding whatsoever we are not accusing Spruce Point of doing anything illegal as Vito Corleone said “I don’t care what a man does for living.” We know what short sellers do, how they operate and they tactics they will use. We have seen this many times before and will see it again with some other diabetes company in the future.

What we will say is we believe all the stars are aligned in favor of Dexcom and their long-term future. As we have said many times this is all about talent and talent is something Dexcom has in abundance. Does this mean mistakes have not been made or will not be made in the future, of course not. However looking at market dynamics alone Dexcom has a very bright future.