Stay Well Clear of SOS Limited Whether or Not the Accusations Stick

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An interesting tug-of-war has gone on between short-sellers and investors in SOS Limited (NYSE:SOS). Indeed, SOS stock has been on a very turbulent ride in recent weeks.

a crypto mining rig
Source: Mark Agnor / Shutterstock.com

The company started the year priced at $1.44 per share, went parabolic to nearly $16 per share, and now trades in the $5 range.

Allegations made by short-seller Hindenburg Research have poured some cold water on what was turning out to be a red-hot play for crypto investors.

However, it appears SOS, as well as a number of investors, are launching their own “long campaign” of sorts. Recently, a variety of rebuttals to claims made by Hindenburg have blurred the story. Some believe that the short thesis on this stock is weak, and the due diligence performed was done so in a misleading fashion.

Accordingly, let’s dive more into this “he said, she said” story.

A Closer Look at SOS Stock

SOS is a China-based high technology company that has been around for a while. The company’s been listed in the U.S. since mid-2017 and got its start as an “emergency rescue services” company (hence the SOS symbol).

To be honest, I’m not sure what “emergency rescue” refers to in this context. However, according to the company’s website, it provides “customers with rescue, big data, trade, digital asset management and other information technology services through AI block technology + satellite communication.”

However, the company’s recently announced shift to cryptocurrency mining is what has some investors all giddy about this stock.

SOS reportedly already acquired 5,000 mining rigs, with another order of 5,000 additional miners received late February. A contract with a local Chinese hydropower resource has been completed, and reportedly, these machines are delivering Bitcoin revenue.

Okay, Let’s Get to the Allegations

However, Hindenburg doesn’t believe in the SOS story at all. In fact the short-seller announced on Feb. 26 it was short SOS.

Why?

Hindenburg alleged various discrepancies in regulatory filings. Specifically, Hindenburg visited one of the facilities listed in the company’s regulatory filing and found it to be a hotel.

The short-seller followed this up with a series of tweets, in which Hindenburg called SOS stock an “obvious China-based shell game reanimating the corpse of a former China based company that earlier imploded 90% from its highs.”

The company highlighted issues with a couple of annoucements SOS made following its shift to cryptocurrency mining.

It purports that its FXK acquisition (a Canadian cryptocurrency company) was really “an undisclosed related party shell.”

Furthermore, the company’s aforementioned recent acquisition of thousands of mining rigs from HY International? Hindenburg believes this deal was likely made up, or at least highly questionable.

We found that HY was formed mid last year, and is registered to the same exact address as an SOS subsidiary,” the firm reported.

Those are some pretty damning allegations.

Okay, Now for the Rebuttal

Sometimes short-sellers get it wrong. I mean, we’re all human. Some of us are just more pessimistic than others.

Short-sellers make money by being naturally pessimistic. They look for companies they believe are hiding something. They turn over every rock they can find, trying to unearth the next Enron.

In this way, short-sellers are a key force in providing stability to markets. Indeed, short research is just as important as long research for the price discovery markets require.

However, some investors believe Hindenburg’s way off-base with its allegations. An interesting contradicting report from a firm calling itself Scorpio VC highlighted what it views as discrepancies in the Hindenburg report. Among these:

  • SOS’s official registered address and actual office address are two separate concepts. One is used for filings, whereas actual operations happen elsewhere.
  • SOS has updated its address on its website, and posted videos of tours of its crypto mining facility.
  • The report highlights what appears to be a complex ownership structure, which may explain some of the issues around what Hindenburg believes is a shell game going on.

It should be noted that Hindenburg visited the company’s official office, but tweeted that it appeared empty.

Should Investors Consider SOS Stock Right Now?

Personally, this story is extremely intriguing to me.

On the one hand, you have a difficult-to-assess foreign company providing investors with less-than-perfect information. Indeed, it’s easy to make the case that if insiders wanted to hide something, it would be much easier to do so with a complex foreign structure in a market like China.

On the other hand, all cryptocurrency investments today are in some ways a leap of faith. I truly believe that a very small (perhaps microscopic) percentage of crypto investors could succinctly and intelligently speak to how Bitcoin mining actually works, at a sophisticated technical level.

In this way, I think SOS stock is a great example of the speculative fervor in the cryptocurrency space today.

Personally, I’m going to stay as far away as I can from stocks like these right now. Whether the allegations are true or not is less important to me than the fact that cryptocurrency mining is inherently far too risky for any conservative long-term investor to consider right now.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.


Article printed from InvestorPlace Media, https://investorplace.com/2021/03/stay-clear-sos-stock-accusations/.

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