Firms should have a contingency plan in place - even to thwart short sellers

THE fear and uncertainty surrounding the novel coronavirus outbreak has undoubtedly created profitable opportunities for short sellers.

These are short-term traders who aim to capitalise on fear and falling prices by selling first and then buying later to cover the original sale. Although it has been almost two years since the local stock market's last major short selling attack involving blue chip technology firm Venture Corp, all companies should be cognisant of the risk that their shares may be the next target. It therefore pays to have a formal action plan in place to minimise the impact.

In Venture's case, an anonymous online article in April 2018 questioned the company's earnings and essentially claimed that the stock was overvalued. Analysts then started to question the source of Venture's earnings following release of the firm's latest figures the day after the short selling report. Following several downgrades by research houses, the stock lost almost 30 per cent in a few weeks. Observers will also recall the case of Olam International, a high-flying commodities firm that in 2012 was the target of critical reports by a short seller named Muddy Waters. The reports questioned Olam's accounting practices, and this exerted tremendous pressure on its share price.