What happened

Shares of PetIQ (PETQ -0.33%), a provider of pet medication and veterinary services, are down 16% as of 1:49 p.m. EDT on Wednesday. The double-digit decline is directly attributable to a short report that was published earlier today.

So what

Short-seller Spruce Point Capital Management released a scathing report today on PetIQ. The report predicted that the stock was about to fall substantially because of the following factors:

  • Competition in the pet medication industry is growing. Spruce Point believes this will cause PetIQ's margins to decline substantially.
  • The recent acquisition of VIP Petcare is a cause for concern.
  • PetIQ's management team has engaged in questionable business practices in the past.
  • The company's current valuation has become detached from reality.

When combined, Spruce Point estimates that the stock is currently worth about $2 to $8 per share. That's sharply below yesterday's closing price of $30 per share.

A professionally dressed man grabbing his hair as if stressed and sitting at a laptop computer with cups of coffee everywhere.

Image source: Getty Images.

To add insult to injury, a national securities litigation firm named Block & Leviton also announced that it is opening an investigation into whether PetIQ's management team had violated federal securities laws in response to the short-seller's report.

The one-two punch is causing traders to flee.

Now what

Investors should never dismiss a short-seller's report completely, but they should also view it with lots of skepticism. That's especially true when the author of the report has already initiated a short position in the stock and directly benefits from the share price falling. That's the case with this report as Spruce Point Capital admitted that it was short PetIQ's stock prior to publication. That means it's already made a bundle off this report no matter the outcome.

PetIQ is set to report its first-quarter results on Wednesday, May 8. Bulls and bears alike will want to tune in to the company's conference call with investors to hear what management has to say in response to this situation.