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Why Shares of SmileDirectClub Were Down Today

By Lou Whiteman - Updated Oct 17, 2019 at 5:30PM

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A short-seller goes on the offensive over disclosure of a raid by regulators.

What happened

Shares of SmileDirectClub (SDC -3.31%) traded down more than 12% on Thursday afternoon before recovering somewhat, after a short-seller tweeted that the direct-to-consumer dentistry company had been "raided" by California regulators. Full details of these alleged raids are uncertain, but it was enough to send investors running for the exits.

A person reacts in anger to a falling stock chart.

Image source: Getty Images.

So what

SmileDirectClub, which went public last month, was already facing concerns about the company's growth outlook and questions about its teledentistry approach. On Thursday, short-seller Hindenburg Research added to those concerns when it tweeted that SmileDirectClub failed to disclose to investors that its stores in California had been raided as part of an investigation.

Via Twitter, Hindenburg said that SmileDirectClub "knew of these raids and that an investigation that had taken place in the largest state in the U.S., and investors did not."

The tweets appear to be based on information contained in a lawsuit filed by SmileDirect alleging the Dental Board of California was prompted to look into the company based on the recommendation of dentists who sit on the board. Assuming so, the raids occurred in May 2018, and the company's regulatory scrutiny had been discussed in the press in the past, which might explain why the stock made back more than half of its initial decline by the close of trading today.

Now what

Investing in growth stocks and emerging technologies like SmileDirectClub always carries risk, and regardless of the merits of Hindenburg's claims, the stock reaction is an indication of how nervous investors are about the company.

SmileDirectClub could still end up being a good investment, assuming the company can stave off critics and establish that it really does have a better, more affordable way to realign teeth. That remains to be seen. What does seem clear right now is that as this battle between bulls and bears plays out, the shares are likely to continue to experience significant volatility.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool has a disclosure policy.

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