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The chief investment officer of short seller Blue Orca hit the headlines last week after his firm released a scathing report into job search platform Seek's (ASX: SEK) operations in China.
But for Soren Aandahl (pictured) the short on Seek is not his first rodeo with an ASX-listed darling.
While his current outfit Blue Orca might not ring too many bells for those who monitor shorts of listed Australian giants, his work with Glaucus Research might.
As co-founder of Glaucus, Aandahl began pursuing Australian companies in 2017, first targeting Quintis, a WA-based grower of Indian sandalwood.
But it was his short of Queensland-based asset manager Blue Sky Alternative Investments that really gave him notoriety.
The demise of Blue Sky has been well-documented, and while much of the company's undoing came down to internal failures, Glaucus' initial report certainly initiated that decline.
In 2018 Harvard-educated Aandahl left Glaucus to set up Blue Orca Capital, and two years later he has turned his attentions to the ASX once again, alleging Seek's Chinese-based subsidiary Zhaopin is significantly overvalued and propped up by "zombie" businesses and fake resumes.
While the debacle with Seek is ongoing, Business News Australia spoke to Aandahl about the short of a company he believes is currently in a "death spiral".
But what goes into his decisions, and how does one position a short in an economy arguably inflated by stimulus and ticking along with the principles of modern monetary theory? Read on to find out.
What is your approach to short selling in a world where markets are arguably inflated by monoetary stimulus?
Our approach to short selling in the market has been really consistent in bull and bear markets alike. It's a fundamental deep dive approach. We think we spend more time looking at our companies that we research than anyone else in the market, including the long holders, coupled with a really fundamental deep dive due diligence that hasn't changed.
Should investors be wary about the activities of businesses in China, given transparency issues of players in the country?
I think you hit the nail on the head. I think there's no substitute, in any market, for investors to do their own work.
I think what's a little bit challenging in a case like Seek and other names, whether listed either here in the US or Australia or Chinese businesses, is that there's a bit of a language barrier.
It's not often easy to do due diligence on companies across borders like that. We've focused on China over the years because we just have noticed that investors have to really do their homework. And the reality on the ground in China is often different than what's sort of portrayed to Western investors on stock markets in Australia and in the US.
To what extent do you think that companies are using the pandemic as an excuse for poor business fundamentals right now?
It's widespread.
There's a couple of things that have made the pandemic particularly difficult to make good stock valuations. One has been the cheap flow of money into the markets. It's been a tide that has risen all boats; the ones that are worthy and the ones that are not alike.
And then the second thing is that for any fundamental weakness or deterioration in the business companies have a ready excuse. In Seek's case I'm sure that they're going to blame some of their poor performance on the pandemic but what we saw in our due diligence was, first of all, China should have come out of the pandemic by the time they reported their fiscal year end because the virus had long abated there. But also a lot of the issues that we identified with zombie resumes and fake posts preceded the pandemic.
What were the red flags with Seek that really brought the company to your attention?
Well we first noticed it because it's a roll-up, and like a lot of roll-ups it had a high amount of debt. And then, it had really low earnings quality which is kind of just a fancy finance term for a lot of their net profits in any given year weren't driven by the underlying business - it was driven by one-time non-cash gains, which is always a red flag.
So the combination of those three things - the debt, the roll up and the non-cash gains - were immediate red flags for us. And that's when we decided to kick off our due diligence.
Do you know why the Chinese platform is, allegedly, so filled with these fake resumes and job postings?
It's commonly misunderstood as a growth story, but we think the analogy that's more apropos is a death spiral.
We think that, for example, the zombie resumes, the fake resumes, the allegation of a student who said that he posted 11,000 fake resumes on the website, was that the website itself had declining popularity, and that's why they needed to pay to put fake resumes on there to entice jobs to entice employers.
This isn't really a story about the future - we think it's actually already happened. I mean, Seek says it's the number one player in China. But if you look at the data they're actually far behind the leader which is BOSS.
So we're already seeing declining popularity and, you know, in our view, it's no wonder that's the case. I mean, why would job seekers join a platform where they're highly likely to encounter fake posts from fake employers and then why would employers join a platform with zombie resumes? See, it has a sort of compounding effect to it.
So is BOSS just absolutely wiping the floor right now?
Yeah, certainly the data says that.
What's interesting about the data is Seek say they want to compare themselves to 51 Jobs, and they cite the data, but that same data set shows that BOSS is far and away the more popular platform.
How aware do you think Seek is about all of this?
Well, I think they're pretty aware now.
Seek certainly has its fair share of cheerleaders, but what we ask anytime we discuss a short that's an idea is that sort of clash of opinions, to kind of take the ideas and address them on their merits.
We've done so much work on this and we think also that one of the reasons Seek is grossly mispriced is because the people that are so fond of the stock haven't done as much actual work on the ground parsing the popularity of the platform in China.
This growth engine that they think is going to be so valuable to service this toxic level of debt, we think the cracks are already starting to visibly show.
Do Seek's managers even know about it? How much transparency do Seek's managers even have into the Chinese business? That is the question that kind of lingered out there and remains unanswered.
You worked on the short of Blue Sky within Glaucus how was that ride and did you predict what eventually happened to the company?
With Blue Sky, from the very first day that I ever picked up a report, I thought it was a fraud.
The claims were just so fantastic and hit all of the red flags. A very, very central claim with Blue Sky was that they had generated 15 per cent net IRR for 15 years which, if that was true, would have essentially made them one of the best investors on the face the planet, even though they rarely ever exited any of their investments, other than commercial properties in Brisbane.
So you know right from the moment you picked it up, not only were those sensors completely activated, but I felt it to be just a matter of time because it took a long time on that project for us even do our due diligence. It probably took about five months of work just because it was so hard to get information about what they were invested in and what they were claiming. It was deliberately opaque. But in terms of anticipating where, when and what they really weren't - yeah absolutely.
One of the interesting things about Blue Sky is that it all seemed so obvious in hindsight.
It's funny you mention that because that's really one of the central characteristics of great investment ideas. I find that when you look back on them the words you think to yourself are, "Why didn't I think of that before?", it just seems so obvious.
And that's true for like a lot of investors, we have a lot of respect for the long side and the short side - sometimes you pick up their ideas and you think "This is great, it's so obvious, how did I not think about this".
But you don't see the months of work and the grind that kind of goes into it. But yeah, I think that that's like one of the ultimate compliments you can you can pay anyone.
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