What's happening: Shares of Caesarstone Sdot-Yam (NASDAQ:CSTE) fell as much as 17% on Wednesday morning. The stock is exploring new 52-week lows at these prices, on the heels of an even larger earnings-related plunge two weeks ago.
Why it's happening: The Israel-based maker of quartz countertops and floor tiles is under attack from short-selling market research firm Spruce Point Capital Management. In a 54-page research report, published on Wednesday morning alongside another 92 pages of supporting materials, Spruce Point accuses Caesarstone of selling substandard products at premium prices, which allegedly leads to overstated profit margins and an unsustainable business model.
According to Spruce Point, Caesarstone shares should trade somewhere near $15 per share. The firm argues that Caesarstone's materials contain less quartz than advertised, as shown by an independent materials analysis. As such, the products should be sold at far lower prices, putting pressure on Caesarstone's profit margins. Moreover, the stock should trade at a discount to other building products manufacturers rather than a premium, the report said.
The suggested $15 fair value per share is more than 65% below current prices and 79% below all-time highs set just two weeks ago.
As of early afternoon, Caesarstone had yet to respond to Spruce Point's accusations. In the recently reported second quarter, earnings increase 26% year over year on 10% higher sales, and management lowered its full-year revenue guidance by 4%. Spruce Point sees the disappointing sales as a "canary in the coal mine," raising the risk of missed goals in future quarters.
Short-selling analysts such as Spruce Point wield plenty of market-moving power when it comes to relatively thinly traded small-cap stocks. The firm is actively selling Caesarstone shares short at the moment, and stands to profit directly from even a short-lived plunge. That being said, even self-serving reports can turn out be correct. Further research is needed before jumping to any conclusions here.