Shares of oil-services provider Flotek Industries (NYSE:FTK) are down 20% as of 12:30 p.m. EST today. The culprit behind the decline is a scathing short-seller report from FourWorld Capital Management; the piece describes how Flotek's surfactant products for the hydraulic fracking industry do not perform as the company claims, and highlights several flaws in Flotek's marketing and research.
The (excessively long, in my opinion) short-seller piece claims, and gives evidence for, numerous inconsistencies in Flotek's reports over the years. One of these involves the actual efficacy of Flotek's surfactants in improving well performance. The research also points out that the much of the data in Flotek's most recent investor presentation slides show very inconsistent statistics about its customer base.
Based on the report and Flotek's own disclosures, there are two major issues to consider. One is that the firm that wrote this piece has a short position in Flotek. So while the report highlights major flaws in the company, the firm does stand to profit if Flotek's stock craters, as it has today.
But that doesn't mean that the points brought up in the report are wrong, either. A quick glance at Flotek's investor presentation shows glaring inconsistencies in total customers, and the rest of its investor presentation doesn't exactly restore confidence.
For investors, there are a whole bunch of things that smell fishy here. These kinds of long-winded short-selling pieces tend to trigger a drastic price movement, and it just so happens that the author of the piece will profit from that very decline. At the same time, the report does bring up enough valid points to give pause to anyone thinking of using the stock drop to pick up shares at a discount. This looks like a no-win situation for investors, and it's probably best to just avoid it at all costs.
The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
More from The Motley Fool
The Simple Reason I'll Never Buy Flotek Industries
Until the company responds to biosecurity issues in its supply chain, I won't be going anywhere near it.
3 Stocks Set to Drop
Investors may want to look the other way when it comes to Chemours, Flotek Industries, and MGP Ingredients.
Shares of Flotek Industries Tank on Earnings Loss
It was another quarter of lower-than-expected results from the specialty chemical manufacturer.