Carson Block Doubles Down On GSX Short As Clients Notice Mounting Losses

Carson Block is still short GSX Techedu Inc GSX despite the stock's momentum in the opposite direction, the notable short seller said Wednesday in a Bloomberg TV interview.

What Happened: Block and his firm Muddy Waters Research argued in a May short seller report that the China-based online education platform is riddled with fraud and up to 90% of users are fake.

GSX called the allegations false and said at the time that Muddy Waters "lacks a basic understanding of GSX's operations." 

Since then, the stock has rebounded from the low $30s to near $60 per share, and Block's clients and investors are "noticing" the unprofitable trade, he said. 

The stock's surge is "nothing we haven't seen before," and Muddy Waters has additional research and plans on "saying more" about the stock, Block said.

"I don't think the problem is that we failed to convince anybody," he said. "I think the stock is doing what it is doing for technical reasons."

Why It's Important: GSX's stock is seeing support in the options market and "somebody is reliably jamming it into the close most days," he said.

In addition, a "very friendly brokerage firm" in Shanghai rated the stock with a "strong-buy," the short seller said. 

In the U.S., Guy Gentile, who Block called one of the "more questionable characters in U.S. markets," blogged about a short squeeze last week.

"Somebody seems to be pulling out all the stops here to keep the stock price elevated," he said. "But at the end of the day, it's a fake company."

Gentile told Bloomberg in a statement that he is a short-term and technically driven trader that recognized a short squeeze and traded on it as such.

What's Next: A "fake company" will ultimately face one of two outcomes, Block said: either it is acquired or collapses.

That's especially true when it is exposed, Block said, adding that in GSX's case, it is unlikely the company will be acquired.

Separately, the political standoff between the U.S. and China is starting to boil over into American stock markets, and GSX's stock surge is a "middle finger pointed at Washington," he said.

If the China Securities Regulatory Commission wants to prove it is serious about regulating its native companies to ease U.S. concerns, it needs to "start looking into" GSX and maybe even "cracking some skulls," the short seller said. 

"If they don't do it, it is going to reinforce the perception that a lot of us here in the U.S. have and that is the CSRC is not intending to be a serious regulator of U.S.-listed China companies." 

GSX shares were down 3.79% at $56.28 at the time of publication Wednesday.

Related Links:

Carson Block Says Up To 90% Of GSX Users Could Be Fake

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