Shares of pest-control company Rollins (ROL 1.42%) plunged to 52-week lows today after Spruce Point Capital maintained its strong-sell rating for the company. When the research firm first published its short report on Oct. 4, the market barely reacted. But it seems to be taking the report more seriously today, with Rollins stock down 10% as of 2:50 p.m. ET on Thursday.
Why short a long-term market beater?
Even trading at 52-week lows, Rollins stock is still beating the S&P 500 over the last 10 years. Many investors believe that long-term winners keep winning -- but not Spruce Point Capital. It believes that shares of Rollins could drop down to anywhere from $21.75 to $25.40 per share. This implies 22% to 33% additional downside from where the stock traded as of this writing.
Spruce Point Capital sees multiple problems with Rollins, including increased competition and difficulties with its growth-by-acquisition strategy.
What investors are seeing today is a change in market sentiment toward Rollins, perhaps nudged toward the negative by the short report. And that's why the stock fell today.
What should investors do now?
Short-sellers do have financial incentive to see stocks go down. So take Spruce Point Capital's report on Rollins with a grain of salt.
That said, shareholders shouldn't blindly dismiss short reports, either. When it comes to Spruce Point Capital, perhaps its most valid point is about Rollins' largest shareholder, LOR, a company controlled by the company's founders and which owned over 40% of Rollins stock. But it sold part of its stake for $1.3 billion in September.
With Rollins' founders getting up in age, they could sell more. In other words, there could be more sellers than buyers, and this could put downward pressure on the stock in the near to medium term.
However, long-term investors might want to give Rollins a closer look. Revenue and net income hit quarterly records in the company's most recent quarter, and it's still enjoying organic growth. Therefore, selling pressure from insiders for estate-planning reasons could be a gift to investors, assuming key business metrics hold up.
