Short Seller Spruce Point Targets Generac, Alleges 'Numerous Shady M&A Deals'

Shares of residential portable generator stock Generac Holdings Inc. GNRC dropped 6.6% on Wednesday morning after short seller Spruce Point Capital Management released a new report on Generac suggesting the stock may be significantly overvalued at current levels.

Questionable Decisions: In the report, Spruce Point claims Generac's recent acquisition spree has come because the company is attempting to pivot away from challenges in its core generator business. However, Spruce Point said Generac is investing in unproven and highly speculative clean energy products and services that ramp up risk for investors.

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"By the Board’s own admission, Generac’s Chairman and CEO lacks the expertise to implement its strategy shift, which we believe is evident by our research which shows numerous shady M&A deals and partnership decisions," Spruce Point said in the report.

The firm claims to have found evidence of a "sham revenue transaction" by recent Generac acquisition Off Grid Energy. Spruce Point also alleges Generac has made a "shady" transaction with solar power company Sunnova Energy International Inc NOVA and is partnered with Pink Energy, which Spruce Point believes is under investigation by the Federal Trade Commission for "misleading customers."

Spruce Point also claims Generac's market valuation got a huge boost from its position as a play on social distancing and the work-from-home environment during the COVID-19 pandemic. In response to pandemic demand, Generac expanded its capacity, a decision which Spruce Point said will weigh on its growth moving forward.

Clean Energy Pivot: Spruce Point said Generac's valuation suggests the company is getting credit as a clean energy company with a proven track record when its clean energy pivot is still in the very early innings.

"After heavily promoting its recent clean energy acquisitions, Generac recently guided down margins and blamed it on 'the start-up nature' of the acquisitions. Buyer beware: on average, Generac’s acquisitions were founded nearly 15 years ago," Spruce Point said.

Spruce Point also included a target valuation range for Generac of between $110 and $132, well below its current price of around $210.

Generac did not immediately respond to Benzinga’s request for comment.

Benzinga's Take: Spruce Point makes some bold claims about Generac's business and management, but the market seems at least somewhat skeptical of the report, given Generac shares are down less than 5% in response. Assuming analysts haven't missed the mark with their outlook, Generac shares trade at just 15.7 times forward earnings estimates.