Goodness, gracious Jumia what is going on? Who is Andrew Left? What is Citron Research? And why did they publish a research report on Jumia with this introduction that would make you want to swap your nationality with Somalia?
“In 18 years of publishing, Citron has never seen such an obvious fraud as Jumia. As the media in the US is naively anointing Jumia the “Amazon of Africa”, the media in its home country of Nigeria has a plethora of articles discussing the widespread fraud in this Nigerian company. Not even that elusive Nigerian prince can cover this one up.”
It has to do with this man. His name is Andrew Left.
Oyinbo people and their names. Anyway, Mr. Left is the author and editor of Citron Research, an investment newsletter. He is a short seller. A short seller is a person that sells short people for money.
Bad joke. Let’s try again. Speaking of Jokes, check out Ben the builder.
A short seller makes bets on the stock market that the price of a stock of a company will fall. When you “short” a stock, you are taking a guess that the price will drop so you can profit from it. In order to execute this, you borrow shares of the stock you want to short from a Stockbroker at a certain price, sell them on the stock market, hope that the price drops, then return the shares to the stockbroker at the lower price and pocket the difference. You borrow the shares because short selling is done with shares that you do not own.
Let’s illustrate with some small maths.
We have “Stock A” trading at a share price of N10 per share.
You do some analysis and feel the stock price will drop in the near future.
You borrow 100 shares of “Stock A” from a stockbroker.
So 100 shares x N10 per share = N1,000.
So you sell the 100 shares at N10 per share and you have N1,000 in your pocket.
Remember, you have to return those 100 shares oh! You borrowed them from the stockbroker!
Let’s assume your analysis was right and the price of “Stock A” drops to N5 per share.
You now buy the 100 shares back from the market at N5 per share.
So 100 x N5 = N500.
You return the 100 shares back to the stockbroker.
You gained the difference of N500 on your bet.
See? Sweet profit!
It doesn’t always work this way oh! Short selling is risky business! Your analysis could be wrong and the stock price could increase, going in the opposite direction of your prediction, meaning you now owe the stockbroker more money than you initially borrowed.
Using our example above. Imagine if the price of “Stock A” increases to N15 per share.
So those 100 shares x N15 per share = N1,500.
Remember, when you borrowed the 100 shares from the stockbroker, you sold them at N10 and pocketed N1,000.
Now, at N15 per share, you are paying back N1,500 meaning you lost N500 on your bet.
Anyway, people like Mr. Andrew Left of Citron Research have made a career out of shorting stocks. Sometimes they get it right and make money, sometimes they get it wrong and lose money.
In order to boost their chances of making money, they release research reports on the stocks they want to short in the hope that it will influence lots of investors to sell the stock and drop the price.
Remember the law of demand and supply. If lots of people demand an item and want to buy it, the price will rise. If lots of people start selling an item, the price will fall.
Sometimes, short sellers exaggerate things in their research reports in order to make investors panic.
So Jumia is the latest target for Mr Left and his report caused some investors to panic and sell the stock. See the impact below. The stock dropped by almost 20%
FYI: This took place in America. Jumia does not trade on the Nigerian stock exchange.
So the question is, are the things Mr. Left says in the report accurate? We’ll leave that for you to decide!
To read the full report, click here https://citronresearch.com/wp-content/uploads/2019/05/Not-All_IPOs-Are-Created-Equal-Jumia-is-a-Fraud-.pdf
Drop us a line and keep on talking!