Loop Industries (LOOP) shares were touching 52-week highs by early October after the company announced a new strategic partnership with Suez. The bullish share price action over the year was abruptly interrupted upon the release of the Hindenburg report, a firm known for their short attacks, particularly the recent high profile Nikola attack which saw previous CEO Trevor Milton resign. The report, as always, raised some serious concerns regarding Loop’s core technology and also referenced compelling evidence. I believe the following market reaction with a share price fall of more than 50% was more than fair and I urge investors to stay away from Loop Industries until a better response which properly addresses the issues highlighted comes (whether it comes at all).
The report, as synonymous with Hindenburg, came full of detail. Even before this report it’s clear (with hindsight) that Loop Industries had exposed themselves to a potential short attack. Loop had claimed to have developed a technology that was revolutionary but had actually obtained no revenues, similar to that of Nikola (NASDAQ:NKLA). Because investors are primarily paying for the potential of Loop’s technology, if someone uncovered problems with this, it would be hugely damning to the business image and shareholders. Well, this is what has occurred in Hindenburg’s report which has exploited Loop’s weaknesses.
I advise investors to first read the Hindenburg report before proceeding with this article.
For quite a substantial period Loop Industries have played on their technology to fuel positive share price action. This is after all the technology that the company was built on and provided so much promise for the future. The market was clearly caught in two minds regarding technology. The market value was previously priced at around $700 million for Loop, a small amount when you consider the claims that the company has made about its revolutionary technology which could apparently tackle a recycling problem that the big boys had struggled to solve themselves. This technology would be worth billions, so to price it at $700 million showed some belief but not full belief.
Shares collapsed following the report, which was to be expected considering how damning it actually was. All eyes turned to the response, companies have managed to push through short reports relatively unscathed and kick on to give shareholders material gains; however, I will say a 50%+ share price fall is never a good start.
Hindenburg would have been gleaming when they saw Loop’s response because it was more than underwhelming to say the least. Muddy Waters, another renowned short-seller, had actually previously highlighted what not to do when responding to a short report, which was to not respond too quickly as it highlights issues and that accusations made have weight. This was the approach Trevor Milton took and led to him resigning a few days later. Loop took a different approach, that was equally bad – more so on a group/company level. The response was incredibly underwhelming and it felt as though Loop didn’t even want to put a response out. Loop clearly wanted to take the approach of getting on with business and not giving much attention to it; the only issue with that is that the share price had already fallen 50%. A few lines of response doesn’t exactly instill the market with confidence.
The response was so short I can cite its entirety within this article:
“Per the Hindenburg report, Hindenburg holds a short position in Loop Industries stock. Hindenburg Research has not engaged with Loop directly nor does Loop Industries believe Hindenburg Research has done the required due diligence for this report. The claims it makes are either unfounded, incorrect, or based on the first iteration of Loop’s technology, known as Gen 1, which was in use between 2014 and 2017. In 2017, Loop reinvented its process and developed its Gen 2 technology, which is at the core of Loop’s commercialization projects.”
In fact, I would even go as far to say it appeared Loop’s management didn’t even read the full report before making a response. The bulk of the report was directed towards the Gen 2 technology which with the response can be placed under the ‘unfounded’ or ‘incorrect’ heading, not much else was given to actually tackle the points made by Hindenburg.
I believe the report will have lasting and damning effects on the company. So far, the market has relied on partnerships as a way of verifying the promise of the technology, but these partnerships do not appear to be as strong as made out. Coca-Cola (KO) told Hindenburg that the company has ‘many’ technology providers across the globe and that Loop is just one of them. I feel it is unlikely that Loop will develop this relationship into a meaningful partnership that will provide Loop with material financial gain, particularly after the recent report which will lead many of the major firms that Loop appears to be working with to reassess their relationship with the firm.
To no surprise, the SEC has now requested more information about Loop’s operation, technology and agreements, it appears that Loop’s facade is now starting to fall apart as even regulators are getting involved. Even if Loop can give the SEC confidence, they still have a long way to go before restoring confidence back into the market, which is what current investors need.
To make the situation even messier, investors have now also turned against Loop and filed a class-action lawsuit citing wrongful acts and omissions from Loop’s leadership team. These shareholder suits are not uncommon and occur following large short attacks; for example, Genius Brands (GNUS) has had to face a shareholder suit following a short attack by Hindenburg.
After all the recent developments, all management could do was buy a cluster of shares, totaling around $270,000 between 4 directors. I’d like to remind readers that this is measly when comparing it against CEO Daniel’s salary in 2019 which nearly pushed into 7 digits. The buy is more signaling rather than any meaningful purchases. The truth is none of the management wants to put substantial money into the game as it appears even they do not have much confidence in their technology.
Even Roth Capital is trying to stick to their guns and maintain a buy rating, with a target of $16. It shouldn’t be of much surprise that Roth does have a relationship with Hindenburg so most likely have a bias with their assessment. They managed the $24 million public offerings prior to the report. Roth’s analyst response was more compelling than that of Loop’s which says a lot.
Loop has found itself in the treacherous territory now, with headwinds now coming from all directions. Still, Loop’s valuation stands at more than $250 million which shouldn’t surprise many readers in today’s market – where companies with no revenues can have market valuations in the billions. I believe Loop has further to fall, particularly with the SEC now involved and market confidence at an all-time low. One thing I can say is an insider purchase of $70,000 is not going to change that market sentiment.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.