On Sept. 15, short-seller Citron Research offered a scathing "analysis" of Nano-X (NASDAQ:NNOX), a med-tech pioneer that's discovered a cheaper way to provide medical images like X-rays and CAT scans. It's a "complete farce on the market," Citron wrote, and " ... this stock is heading to zero." Synched with the release of the report, Citron opened a heavy short position to send shares of the company sinking.
Several days later, another short outfit, Muddy Waters, accused the company of faking a demonstration video that showcased its technology. "NNOX almost certainly used somebody else's chest images to try to make its ARC [medical imaging] machine look real," the bear insisted, without any proof.
So what should our attitude be toward these clearly biased short-sellers? Should we ignore them? Or maybe we should love our enemies. After all, we know that shorts are always future buyers of our stock. (Even if they don't want to buy, sometimes the brokerage will make them buy, a happy day that we bulls refer to as "the short squeeze.") Also, if we're buyers, we should be happy that we're getting a cheaper price. And finally, every once in a blue moon, the shorts are right and we are wrong -- so maybe we should heed their warnings. Let's investigate and see what's what.
How are shorts attacking Nano-X?
The main argument seems to be that the company is a fraud. Citron says, "This $3 billion company is no more than a science project with a simple rendering, minimal [research and development], fake customers, no [Food and Drug Administration] approval, and fraudulent claims that are beyond the realm of possibility." Both Citron and Muddy Waters have compared the stock to Theranos, the infamous healthcare stock that actually was a fraud.
That's a serious charge. It's not merely saying Nano-X's stock is too expensive or too speculative. These shorts are claiming that the company is a criminal enterprise. Indeed, Muddy Waters, after calling the company "garbage," said that a "convicted felon, who crashed an $8 billion market cap dot-com into the ground, was seemingly instrumental in plucking NNOX out of obscurity and bringing its massively exaggerated story to the U.S." So it's all one giant criminal conspiracy?
Of course, criminal fraud actually does happen. Every biotech investor should watch The Inventor: Out for Blood in Silicon Valley. It's a great documentary about the highly valued start-up Theranos, and Elizabeth Holmes, the founder of that company. She has over 200 patents to her name. And yet her device never actually worked. She's been arrested and charged with criminal fraud. And she fooled some very smart people, including venture capitalists who invested millions of dollars, and her entire board of directors.
It's highly unlikely that's what is happening here. Unlike Theranos, Nano-X actually has many board members with scientific knowledge. The company's 11-person advisory board includes a former chairman of the department of radiology at Duke University and a professor of radiology at Stanford University. On its two boards, Nano-X has hospital directors and healthcare industry executives and former executives, a professor of physics, a law professor, a medical screening professor, several doctors, and the deputy general counsel of the Bill and Melinda Gates Foundation.
Nano-X is not Theranos
When The New Yorker interviewed Holmes -- before she was charged with any crimes -- the journalist asked her how her device worked. Holmes' description of the process was comically vague: "A chemistry is performed so that a chemical reaction occurs and generates a signal from the chemical interaction with the sample, which is translated into a result, which is then reviewed by certified laboratory personnel."
Contrast that to the interview Nano-X CEO Ran Poliakine gave the Motley Fool the other day. He might give you more science than you want to read. But it's clear the man is not a criminal. I would also suggest that Jung-Ho Park, the CEO of SK Telecom, is not a criminal, either. SK Telecom has invested $20 million in the company, and has an agreement to distribute 2,500 Nano-X systems in South Korea and Vietnam. Park also sits on the board of Nano-X.
Hitoshi Masuya, the co-founder of Nano-X, has his name on all the patents. He's a venture capitalist from Japan who partnered with engineers from Sony to develop this technology. I have a hard time believing these Japanese engineers are criminals who took their device to Israel to find another criminal who would agree to lead their vast criminal conspiracy.
While I'm acquitting people, I'll also acquit Foxconn and Fujifilm, too. Foxconn, the iPhone manufacturer, has invested $26 million in Nano-X, while Fujifilm is a major shareholder as well. These companies are investing in Nano-X not because they want to defraud the public, but because they want to manufacture the machines, and they see an enormous upside and huge future profits.
Can Nano-X underperform or disappoint? Of course. It happens all the time in the stock market, which is why venture capitalists and other optimists don't put all their eggs in one basket. But these shorts are making wild accusations without any evidence. I'm not only holding my shares, I bought some more.