What happened

The news at transportation company XPO Logistics (XPO -3.05%) just went from bad to worse.

After dropping 9.6% on Wednesday in response to an earnings warning, XPO shares were down another 20.4% as of 12:50 p.m. EST on Thursday as investors rushed for the exits, sent fleeing by a negative report from short-seller Spruce Point Capital.

Large truck rolling downhill

XPO Logistics' downhill roll accelerates. Image source: Getty Images.

So what

What did Spruce Point say to spark today's panic? Here are a few of the highlights:

  • XPO Logistics carries a $4.7 billion debt burden. (Note, however, that S&P Global Market Intelligence puts its long-term debt liability at just $4.1 billion, and the company has more than $400 million in cash.)
  • XPO suffers from an inability to generate sustaining free cash flow. (In fact, trailing FCF is positive $288 million, XPO has generated positive free cash flow for the past two years, and it just finished promising to grow its free cash flow both this year and next.)
  • The company depends on asset sales, among other things, to keep itself afloat. (The last time XPO recorded a cash influx from a divestiture was in 2016.)

And there was the biggie from Spruce Point: XPO is led by "Bradley Jacobs, co-founder of United Rentals (URI) which collapsed in an accounting scandal during his leadership. Based on our forensic investigation, we believe XPO is executing an identical playbook to URI -- resulting in financial irregularities that conveniently cover its growing financial strain and inability to complete additional acquisitions despite repeated promises."

Now what

As a short-seller whose business model depends on spinning a scary story, then profiting when investors get frightened and flee, all of the above runs right according to Spruce Point's playbook -- even if the accuracy of the analyst's allegations is up for debate. Investors who are selling the stock, therefore, are playing right into Spruce Point's trap.

That's not to say investors are wrong to sell XPO, mind you. Even if the numbers aren't quite as bad as Spruce Point makes them out to be, XPO's debt load is large. And its $288 million in free cash flow, while positive, doesn't quite measure up to the $535 million in net profit that it claims to be earning. Add in the earnings warning that came out Wednesday, foreshadowing slower-than-promised growth this year and next, and I admit: If I owned XPO stock, I'd be feeling pretty nervous right now, too.

Spruce Point is just doing what short-sellers do: capitalizing on that.