Things turned a bit strange last week in micro-cap land. On Wednesday, farming REIT Farmland Partners (FPI) buckled under the pressure of a report that the company was artificially juicing revenue via loans made to related party tenants. The company's transparency in these matters was also questioned, and the report also stated the belief that FPI has been significantly overpaying for acquired farms.
(Farmland Partners is a holding of Stocks Under $10, our model portfolio of lower-priced stocks that look like turnaround or high-risk/high-reward situations. You can check out Stocks Under $10's comments on FPI here.)
That was enough to send shares down nearly 40% on Wednesday, and it did not take long for the announcements of a bevy of class action lawsuits to follow. While shares gained back 18% on Thursday, a huge cloud remains over the company. There had been speculation for quite a while that a dividend cut was on the horizon, which would severely damage the shares, but Wednesday's bombshell, whether well founded or not, has likely done more damage than a dividend cut.
I typically extol the potential virtues of owning under followed companies; there are sometimes opportunities to discover situations or opportunities that are not known by the market or baked into a stock price. The FPI situation is an example of how that can backfire. FPI is followed by just two analysts and Wednesday's damaging piece was published on Seeking Alpha by a contributor. I read the piece, which was very thorough, although I am uncertain of its veracity. Later articles suggested that the writer is a short-seller, but that is also unverified.
Needless to say, the damage to FPI has been done. The company did respond to the allegations, suggesting that the allegations are false, while also spelling out what it termed "misrepresentations" about the company's loan program. The company also promised a more detailed response.
In my view, however, the damage has been done. I don't know how this will turn out, but after several years as an FPI shareholder, I've had enough, and closed out my remaining position. I thought that the 2017 merger with American Farmland was a step in the right direction for FPI; it brought with it higher quality/higher value California farmland, complementing FPIs land portfolio in terms of both the type of crops grown, as well as land location. However, my patience has run out with this new cloud over the company, whether founded or unfounded, and rather than wait while the truth is determined, I'd rather move on.
This situation is a great example of a newer dynamic within the equity research world as well. Virtually anyone can publish "research" on a company these days. While this can and sometimes does provide some unique insights that might not otherwise be available given the dearth of coverage on many small and micro-cap names, it also has dangerous elements. You can't believe everything you read, and must be discerning about authors, their pedigree, and self-interest.
One article, whether true, false, or containing elements of truth, cut FPIs market cap by 40% in one day.