Wirecard, short-sellers, and big tech

The worrying thing about the collapse of German fintech stock Wirecard is not that it happened, but that it took so long.

In the early noughties, Wirecard was known for processing payments in the pornography and gambling sectors. In 2006 it moved into banking, following an acquisition, by issuing credit cards and handling money on behalf of merchants. This hybrid approach created a decent growth story, but it also made its accounts harder to analyse.

According to research published by the CFA Institute, “work from home” (WFH) stocks have seen their beta ratio fall by 31% to 0.90, against 2019, with Amazon falling 54% to 0.60

A shareholder lobby group alleged balance sheet irregularities in 2008. With auditor EY by its side, Wirecard faced down this attack, and several more after 2015 when the Financial Times published its first of many criticisms.

Following a big acquisition in Asia in 2018, Wirecard’s shares hit a new peak. It replaced Commerzbank in the Dax 30 and talked of taking on Silicon Valley.

Following reports of a Singapore probe into its affairs, German regulator BaFin ordered a two-month ban on short selling, citing Wirecard’s “importance for the economy.”

In June 2020, following a KPMG audit, Wirecard confirmed 1.9 billion euros had gone “missing”. It filed for insolvency at the end of the month.

Investors in Germany loved Wirecard. It was a classic fintech story, where positive factors overwhelm the negatives and offered a challenge to the US financial establishment.

The company was smart at defending its corner and enlisting allies. But the flow of funds into tech-driven stocks played a critical role in deflecting criticism by helping Wirecard’s shares defy gravity. They traded above 100 euros through much of the last five years.

Short sellers never gained traction, until the very end. Carson Block, founder of Muddy Waters Research, recently told Bloomberg he only briefly shorted Wirecard in 2016 after deciding he didn’t want a long position in BaFin.

The fund flows which provided cover for Wirecard are continuing to provide support for other share prices, even where this is not deserved.

A steady fall in the quantity, and quality, of third-party corporate analysis, does not help. More deals are taking place out of the spotlight, in the private sector. According to Reuters, the FBI is concerned about the impact of money laundering on private equity and hedge funds.

Fund flows have speeded up dramatically this year due to the way central banks are boosting monetary stimulus in the wake of Covid-19. Debt issuance is at a record.

One way to analyse fund flows is to measure how different stocks and sectors perform against an underlying market. This measure is called “beta”.

If the market rises or falls by 1%, a high beta stock will rise, or fall, by more than that. A low beta will be more subdued. Sector betas of 1.0, or just over, were not uncommon last year.

According to research published by the CFA Institute, “work from home” (WFH) stocks have seen their beta ratio fall by 31% to 0.90, against 2019, with Amazon falling 54% to 0.60. Pharmaceutical beta has dropped 24% to 0.81, with the beta Moderna, and its treatment for Covid-19, trading below zero. Technology has fallen 19% to 1.11.

Traditional sectors have travelled the other way, with the beta for real estate beta rising 160% to 1.16, financials rising 23% to 1.30 and energy 14% to 1.26.

The CFA research paper concludes: “When it is time to rebalance portfolios, stocks from so-called low-volatility sectors may now increase risk, and vice versa.”

All this is good news for passing peddlers of moonshine and bad news for short-sellers. UK-based Lansdowne Partners has decided to give up short-selling altogether.

Carson Block is deeply worried over the “morphine of monetary stimulus.” He has no plans to take on stocks like Tesla despite their stratospheric share rating: “It’s one thing to bet on Elon Musk, but it’s another thing to bet against him. The guy specializes in pulling rabbits out of the hat.” He is choosing his targets with care.

In the absence of sellers, the Fang+ index of giant internet stocks is currently trading on a giddy earnings multiple of 55. Value shop Verdad has found 500 tech-driven stocks which are even more expensive, with aggregate earnings are precisely zero. It calls them the Bubble 500.

You may believe this reflects a new paradigm, where technology is going to disrupt the world. Or you may think growth stocks are massively overvalued, given the unsettling economic outlook.

Family Capital goes with the new paradigm. But momentum has driven stocks a long way. And they never go up in a straight line forever.