Whitney Tilson, a well-known fund manager, shorted shares of 3-D printer manufacturer 3D Systems (NYSE:DDD) shortly before the share price peaked in early January. He's made out pretty well since then, as the share price has dropped by 38% since its January high, as of this writing. However, he based part of his thesis on an earlier report written by the group at Citron Research. Because Tilson referred to that report, and I respect his investing chops, I decided to review it -- again -- to see whether there was something I had missed the first time. Unfortunately, I came to the same conclusion I did the first time: Unlike Tilson's argument, no serious investor should take it seriously.

Missed opportunities and outright fails
The report was published in February 2013. In the following highlights, comments and quotes from Citron are italicized, followed with my comments in plain text.

"When it comes to calling out a bubble stock, we are yet to be wrong ... all the way back to the original dot-com bubble. In this article, Citron will detail the bubble that has enveloped 3D Systems."

That excerpt from the opening paragraph apparently attempts to establish Citron's credibility. However, nobody in investing is perfect. As an investor needing to judge how much trust to put in any analyst, my confidence in the analysis would be much higher if Citron showed us its entire track record, with all its right and wrong calls. Citron doesn't.

"Promotional management. Behind every good bubble there is a good promoter, in this case we have the best in [CEO] Avi Reichental. ... His commentary on his space sounds more like the words of PT Barnum than that of a well-polished CEO."

No doubt Reichental is a salesman. Most CEOs are very big on their companies, so he's hardly alone there. But Citron doesn't go on to show how any of Reichental's comments have led the company astray or hurt investors. As it stands, we're left with surface-level criticism.

Citron ridicules several examples of 3D printing:

  1. Presents a toy dinosaur head as an example of "as big as the Internet."
  2. "an egg cup? Really?" [bold in the original]
  3. "We did find one industry that is being transformed by 3D printing ... the sex toy industry. Look what you can make with your 3D printer! A Justin Bieber vibrator."

None of these is really that devastating in pulling down the usefulness of additive manufacturing. It's like criticizing Hewlett-Packard (NYSE:HPQ) because its printers are used to print stick-figure cartoons. In reality, it doesn't take much effort to find examples where 3-D printing and 3D Systems are changing the face of what can be done. Here are three counterexamples:

  1. Artificial leg fairings (thanks to 3D Systems's 2012 acquisition of Bespoke Innovations). These bring style and aesthetics to artificial limbs, making the people who use them happier.
  2. 3D Systems's involvement in producing a hybrid robotic exoskeleton to help people walk, creating custom parts that perfectly fit the wearer.
  3. Custom-fit props for movies. The recent hit Gravity extensively used 3-D printing to produce helmets that perfectly fit the actors.

"Reichental [tipped] his hand about his sensitivity to stock movements in this decision to split the stock (3 for 2). The announcement of this meaningless transaction makes it appear to Citron that the company would rather have you buy their stock than buy their products."

Again, Citron fails to follow up and present evidence that Reichental is obsessed with the stock price. Does he regularly talk about the stock price in public and argue why it should be higher? If so, Citron shows no such quotations.

Indeed, in 3D Systems's proxy statement (consistently since at least 2012), the company has consistently included a strong statement against tying share price to financial incentives for its named executive officers: "While some people consider stock performance to be a significant factor in compensation decisions ... we do not consider stock performance as a controlling factor in making compensation decisions since short-term movements in our stock price and total return to stockholders as reflected in the performance of our stock price are subject to factors ... unrelated to our performance."

Citron specifically calls out The Motley Fool's marketing material as being the reason for the stock's price climb. After requesting and receiving further material from TMF, Citron writes, "There is so much critical misinformation in this slide deck that we will not waste time dissecting it."

David Gardner, co-founder of The Motley Fool and the advisor making recommendations for several 3-D printing companies in two different services of ours, certainly believes that 3-D printing is a game-changer. Marketing material for those two services has pointed out the opportunities represented by 3-D printing and 3D Systems and suggested that people should invest in that company.

However, Citron's "we will not waste time" comment is a broad statement, rather than a specific refutation. By refusing to list specifics, it appears either unwilling to go to the trouble, or underconfident in the strength of its arguments. (Note, however, that I work for TMF, so take my comments with a grain of salt.)

From the marketing material Citron had, it quotes The Motley Fool's ownership disclosure. At the time, the Fool was short Jan 2014 $55 calls. Citron equates this with the Fool not believing the company is worth more than $55 in a year, in direct contrast to the Fool's promotional material.

Here, Citron messed up. The marketing material for 3D Systems comes from the Stock Advisor service, which recommends 3D Systems as a buy. The ownership position was made by Pro, a different service within the Fool that's run by another advisor. The Fool has long publicly stated that management does not insist that each service hold the same opinion. In fact, we encourage differences of opinion.

It's apparent that Citron did not contact the Fool for an explanation of what the disclosed position nvolved and why it was made. I've talked with Jeff Fischer, the advisor for Pro, about that investment. He told me it was an income-producing investment called a "covered strangle," which combines stock ownership with options. Because its goal was to produce income, he was indifferent to where the share price would be when the options expired, and he'd continue the strategy (or not) depending on the options available at expiration. The January 2014 $55 option was chosen solely because it generated a decent amount of income at the time.

Citron writes that 3D Systems spent 6.5% of revenue on R&D, then criticizes the company for low spending -- without providing the dollar amount.

Three things are troubling here. First, out of context, that percentage means nothing. What is the normal level of R&D spending at 3D Systems? (The 6.5% figure was actually lower than the average from 2008-2012.)

Second, how does this spending level compare with other, similar companies, such as Stratasys (NASDAQ:SSYS)? (As it happens, it was lower than the portion of revenue Stratasys devoted to R&D in 2012.) Citron fails to provide these easily found facts, even though their inclusion might strengthen its argument.

Third, the original report mistakenly said that $6.5 million was spent, not 6.5% of revenue. While readers should be happy that Citron corrected the mistake and noted the correction, they should be unhappy because the original fact-checking was not very thorough. It's an easily checked figure.

Citron claims that every investor seems to think 3D Systems makes parts for F-18 jet engines -- or is it the whole engine? It quotes a Forbes article in support.

I don't know what every investor seems to think, and neither, truthfully, does Citron. Searching "3D Systems F-18" pulls up several million results. The second result listed when I did that search (an article at Kurzweil published before Citron wrote its report) refers to something said by Cathy Lewis, a 3D Systems spokeswoman: "3D Systems is also involved in a consortium that is printing 90 parts for F-18 fighter jets and that plans to print 900 parts for F-35 fighter jets, according to Lewis." About the same time, The Economist wrote something very similar.

In the Forbes article, Reichental is quoted saying that "about 90 parts installed on board are printed on our printers," which Citron takes to mean printed by 3D Systems. It goes to some trouble proving that 3D Systems gets no revenue from the F-18 manufacture. Where Citron fails, though, is in distinguishing between "the company's printers," which could mean anyone using them and is what Reichental said, and "the company (itself) prints."

If someone wants to conclude that 3D Systems prints parts for the F-18, that's apparently inaccurate. And 3D Systems itself doesn't appear to make that claim.

Citron highlights another example of a useless product, a comb, and then writes, "the analyst printed his objects using a Makerbot. ... We know this from what he printed out."

How does Citron know that exactly? Was it the material used, the actual item, or what? The report presents no proof.

Citron includes a section titled "Roll up of low-valued companies." It specifically declines analysis of how these could be hurting 3D Systems through "accounting engineering and sheer gimmickry to grossly exaggerate their organic growth." Citron writes, "We do not feel like getting into an accounting argument."

This refers to supposed accounting gimmicks by 3D Systems that others have pointed out. Citron claims that these alleged efforts make organic growth look better than it really should be. A few months before Citron's report was published, I looked at one such argument from Seeking Alpha and found it less than compelling.

My final thoughts
While Citron might indeed turn out to be right about the long-term viability of 3-D printing in general and 3D Systems in particular, I had a very difficult time getting past all the hyperbole and emotional writing used in this report.

The comb, dinosaur head, egg cup, and Bieber vibrator are indeed silly, but those particular items are not what will lead to success for 3D Systems. However, Citron apparently deliberately avoided mentioning things that would, such as the artificial limb fairings.

Add in the several times where Citron failed to provide detailed examples as to why one should short 3D Systems stock, and I have a hard time taking this report seriously.

Almost exactly a year later, this past January, Citron came out with another report, titled "Everything 3D Systems Does Not Want You to Know About Their Business." It's better than this one, and I'll look at it next.

Readers can find each article in the series by clicking here

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.