The trend of Wall Street souring on stocks that benefitted from lockdown trends hasn’t stopped. Spruce Point Management, a noted short seller, has made Generac (NYSE:GNRC) its newest target. The firm recently released a short report in which it made a bearish case against GNRC stock, a name that climbed more than 400% between 2020 and mid-2021. Now Spruce Point thinks it is following in the footsteps of other early pandemic winners that have failed to adapt. It predicts the stock has a downside of 50%.
What’s Happening With GNRC Stock
GNRC stock has been turbulent lately, as have many of its tech peers. The generator producer has shed more than 40% of its value of the past six months. Despite rising in May 2022, it has spent most of June in the red. Today, news of the Spruce Point short report has pushed it down almost 3.5%. As of this writing, there is no rebound in site.
Why does Spruce Point think GNRC stock is about to fall even more? Let’s take a closer look.
No Power for Generac
One thing that makes Generac interesting company is its product. The company producers back-up power generators designed to keep homes powered. But even helping consumers ride out an emergency isn’t enough to help a stock ride out a market, according to Spruce Point. As the short report notes:
Spruce Point believes that Generac was an extreme COVID-19 beneficiary from the stay and work-at-home effect, and committed to material capacity expansion which will be a drag going forward as demand tapers.
Furthermore, we find recent evidence that Generac fails to discuss that its core portable generator business is under extreme pressure with it having to cut prices by nearly 20% to compete against an onslaught of new foreign competition. We estimate this to be up to a $100m cash flow headwind.
If Spruce Point’s findings are correct, then its very bad news for Generac. But the firm would be the minority of experts who see GNRC stock falling as of now. It is rated as a “strong buy” by TipRanks with 15 analysts maintaining “buy” ratings. However, Baird analyst Michael Halloran recently lowered his price target from $369 to $298. InvestorPlace news writer Eddie Pan reports that multiple members of Congress purchased GNRC stock in May 2022.
Spruce Point’s report counters most bullish cases for Generac. The stock has been praised as a potential leader in the clean energy space. But as the short report also called that into question, highlighting Generac’s “highly speculative and unproven acquisition spree in clean energy products and services.” The firm adds that its research “shows numerous shady M&A deals and partnership decisions.”
The Bottom Line
It is not surprising that such a damning short report would push GNRC stock down. What remains to be seen is if Generac can prove the short seller wrong. Some investors are likely to jump ship as the report gains traction, wanting to avoid further losses. It is hard to ignore the fact that there is less need for Generac’s product as Americans transition away from lockdowns.
Details are still emerging on the “shady M&A deals” and “unproven acquisitions” that to which Spruce Point alluded. It is possible that some recent deals may prove beneficial to the company. But until they do, GNRC stock will likely fail to generate any real momentum.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.