Providing after-school online tutoring to students in China used to seem like a good business.
Not anymore. For much of 2020, Gaotu Techedu Inc. (GOTU, Financial), one of the companies in this field, had been dogged by allegations that it had inflated its financial results. Then in July 2021 came the final blow: The Chinese government decreed that companies providing this service must be nonprofit.
That’s why the two people who chose Gaotu (formerly GSX Techedu) in my annual short selling contest won a clear victory, as the stock plummeted 97%.
Short sellers bet on selected stocks to go down. They borrow shares and sell them at what they believe is a high price. Later they must buy shares to replace the borrowed ones. If the stock falls in the meantime, they profit.
My Contest is titled “Short Sellers Don’t Have Horns.” The latest one (the 18th) ran from Sept. 30, 2020 through Sept. 10, 2021.
Two contestants picked Gaotu Techedu as their short, and enjoyed a 97% profit as the stock plunged.
One was Dean Grimes of Pasadena, California, who said he is the chief financial officer for a family-owned business and “in the process of starting my own hedge fund.”
He believed that the company “has inflated its earnings and sales by upwards of 70-90%,” and noted that an investigation was in progress by the Securities and Exchange Commission.
The other winner was Jingshu Zhang of Somerville, Massachusetts. He is an executive with Broad Sea, a Chinese company that helps Chinese college students apply to graduate schools in the U.S.
For the coming 12 months, Zhang says his favorite short is AMC Entertainment Holdings Inc. (AMC, Financial), the movie theater chain whose stock is popular with the self-described “apes” on the Wall Street Bets forum of Reddit.com.
AMC trades for about $44. Zhang says his price target is $5. He regards AMC as “the crystallization of the utter frenzy of this insane bull market.”
Nicola, based in Phoenix, designs and builds electric and hydrogen-fueled trucks. Hohensee was interested in electric vehicles, but as he researched Nikola, he came to regard it as “a concept with no real technology to back it up.”
In his opinion, the company has a “weak engineering team.” And it has no commercial product on the market yet. My understanding is that it hopes to hit the market in 2024.
At the time he picked it, Novus was a special purpose acquisition company, or SPAC, or as Groth put it, “a blank check company.” The stock had jumped 21% on the day that Groth entered the contest, despite the fact that “the company is not engaged in any business operations and has not generated any revenue.”
Subsequently, Novus changed its name to AppHarvest Inc. (APPH, Financial) and its stock symbol to. It intends to engage in high-tech agriculture, and announced plans to build the world’s largest greenhouse in Morehead, Kentucky.
Fourteen people entered the contest this year, 11 from the U.S. and one each from Austria, France and Poland. Only half of the entrants succeeded in picking a stock that went down.
That’s hardly surprising, though. The Standard & Poor’s 500 Index returned 34.47% (including dividends) during the contest period.
You can play
Would you like to enter my short selling contest? The next one will run from the market close on Sept. 30, 2021 to the close on Sept. 9, 2022.
To enter, email me at [email protected] with the following items:
- Your name
- Phone number (weekdays and weekends). I need this in case you win and I want to interview you.
- The stock you pick to decline
- The reason you believe it will fall.
If you prefer, you can mail your entry to John Dorfman, Dorfman Value Investments, 101 Liberty Street, Suite 1900, Boston, MA 02110. Entries must be postmarked or time-stamped by midnight on Sept. 30.
You need not sell a stock short with real money, although you are permitted to do so.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].