A group of firms specializes in research to uncover lies, fraud, and other signs of misreporting in companies traded on the stock exchanges.

These companies are referred to as activist short-sellers.

Think of Citron, Hindenburg, and Muddy Waters.

They don’t just short the stock, they publish a report about it.

And just this past Tuesday, Hindenburg Research released a new short report on a name we all know and many love…DraftKings (DKNG).

DKNG was down as much as 10% on Tuesday following the report.

But the question on every investor’s mind…what’s it mean for the stock?

Should we buy the dip or head for the hills?

DraftKings (DKNG)

DraftKings Inc. (DKNG) operates as a digital sports entertainment and gaming company and is  a major player in daily fantasy sports, online sportsbooks, and igaming.

A change in sports betting legalization has paved the way for DKNG with online sports betting. It’s not just for Vegas anymore and DKNG is capitalizing on this trend.

Going public through a SPAC deal back in April 2020, DraftKings also merged with Bulgaria-based SBTech.

And this week Hindenburg research released a short report on DraftKings (DKNG) stating that SBTech operations are linked to black-market gaming and money laundering.

Read the report here… and see more specifically why Hindenburg is short the stock.

So the question stands…

Is this fact or fiction?

It’s widely believed that DraftKings acquired SBTech for its tech platform rather than its existing revenue stream, so what happens next could just be a bump in the road.

However if that’s not the case, things could get worse.

Do we have all the information? No.

Over time we’ll learn more about how intertwined these “black-market” dealings are with DKNG’s major operations and revenues.

When it comes to the long term view of DKNG, a lot of investors are seeing this as a buying opportunity.

DKNG is operating in a game changing industry.

ARK Innovation ETF (ARKK) currently holds over 8M shares of DKNG, with reports that they acquired $42M worth on Tuesday alone…after “buying the dip.”

For background, ARK Innovation ETF invests in ‘‘disruptive innovation’’ which they define as “the introduction of a technologically enabled new product or service that potentially changes the way the world works.”

That’s exactly where DKNG lies with legalization and a move to online sports betting, fantasy sports and igaming.

It’s a long term game with innovation. It could work out, or it could go bust. That’s something that every investor needs to take into account.

Short Reports & Short Seller Activists

The thing with short reports…these companies have a clear incentive to see the stock go down.

As mentioned earlier, they aren’t just doing research and sharing it. They are also taking a short position, so they make money if the stock goes down…a lot of it.

It’s important to dig through their research and make up your opinion on the matter. How relative is this information to the company? Will it crush the growth or revenues, or is it simply a non factor to overall operations? Is there something really illegal happening, or a gray area slap on the wrist?

All things to ask yourself if you are looking at trading around these short reports.

And…as is par for the course, DraftKings (DKNG) denies any shady activity going on.

With the rise of the meme stocks…shorting stocks has become a bit of a high stakes game of cat and mouse.

The Reddit nation loves to find stocks that are heavily shorted and squeeze the shorts.

So much so that the well known Citron has stated that they will no longer release short reports publicly, focusing more on their long recommendations.

They just so happened to release a short report on the infamous GameStop (GME) before it squeezed to over $400.

And DKNG is a well liked stock by that generation so either way it will be interesting to watch what happens next.

Looking at the daily chart below…

The stock hit a low of $44.65 after the report was released. And got bought up all day, nearly filling the gap after hitting a high of $50.13 the next day.

It took a bit of a dive on Friday as the overall markets were selling off a bit as well.

Was this selling in DKNG just part of the overall market sentiment or is the short report taking hold?

Let’s see what happens Monday.

I’ll be watching this range from $44.65 to $50.13. Can the DKNG get momentum to break above the range or will it sell off breaking to new “post-report lows?”

If you have a little time this weekend, click here to check out my post about a newly budding industry