Don’t sell Eiad Asbahi short

From a suite of swank, sun-drenched offices above an art gallery in Studio Park, hedge fund manager Eiad Asbahi has been waging a proxy war for control of a little-known pharmaceutical company, whose stock is in the tank.

The Georgia-based company, MiMedx, specializes in tissue grafts that have proven highly effective in wound care. Despite its success, however, MiMedx has been dogged by management controversies and allegations of financial funny business. And that’s made it a target of short sellers, who have published negative research about the company, helping drive down its stock price to less than $1.20 per share earlier this year.

Asbahi knows a thing or two about negative research and short selling. It’s how his firm, Prescience Point Capital Management, has built its reputation—by betting against, or taking a “short” position, in a company he has determined to be deeply troubled, then exposing those troubles in research reports that are blasted across the financial wires and social media. When all goes well, the price of the stock falls and Asbahi profits.

But in the case of MiMedx, Asbahi did the exact opposite of what he usually does: He took a long position in a company he believes to be undervalued, and published positive research detailing its overlooked upside potential. He also recruited seasoned industry experts to serve on the company’s board of directors, and pushed to get them elected to the board.

It’s not the kind of high-stakes investor activism you’d expect to find happening in a suburban Baton Rouge office park just off Jefferson Highway. But then, Asbahi is not your typical Baton Rouge investment advisor.

“We don’t just manage your money by pushing a button,” he says. “We’re doing sophisticated asset management—and on a global scale.”

Though little known on the local scene, even among some seasoned investment brokers, Asbahi is building a national reputation as an activist investor with a knack for spotting what others have overlooked and a penchant for going against conventional Wall Street wisdom. It’s a risky way to make money, but if you’re good at it you can do quite well. By all accounts, Asbahi is doing well.

Over the past decade, his firm has shorted the stocks of companies like CB&I, Celadon Group and, even, Kellogg’s, by publishing negative research that has exposed fraud, inflated earnings reports and questionable accounting procedures.

Prescience Point has also identified potential opportunities in companies Asbahi believes to be undervalued, like MiMedx, and invested in those with the intention of profiting when the stock goes up. A prominent example was the parent company of Hawaiian Airlines, which saw the price of its stock more than double in 2014 after Asbahi invested in it.

Along the way, the 70 or so investors in Prescience Point’s roughly $50 million hedge fund have profited, realizing annual returns that average between 20% and 25%—twice the market average.

With the MiMedx battle, Prescience Point is upping its game, taking investor activism to a new and more sophisticated level. Asbahi describes it as an evolution of what he’s been doing all along, and something he finds tremendously challenging. It’s also risky. But if Asbahi hits, he’ll hit big.

“We think this company is worth multiples right now. We think it could be worth many multiples,” he says. “We think they have an extremely promising compound and there is potentially multibillions of dollars in applications.”

Looking beneath the rocks

When you meet Asbahi, the immediate temptation is to try to figure out what the catch is. Someone can’t be this good looking (a recent spread in Institutional Investor suggested he could be the lead in a boy band), this young (he just turned 40) and this adept at consistently outsmarting and outperforming the market (his clients boast they’ve doubled their money in six years). You find these kinds of people on Wall Street, not on Jefferson Highway.

So how does he do it?

Asbahi won’t say exactly, and he is both a little cocky and a little cagey—though undeniably likable—as he offers a somewhat unsatisfying explanation.

“We’ve developed methods that help us get the relevant information that we’re looking for,” he says. “Our techniques have evolved over time and they’re getting sharper and sharper. Today, they’re the best they’ve ever been.”

Suffice it to say he is a shrewd financial analyst, who is also part private eye, part investigative reporter. His idea generation comes from many places. Sometimes he stumbles onto information about one company while looking into a related one. Sometimes, he picks up on something in a conversation with an industry colleague. Sometimes he gets an anonymous tip by phone or email.

“We turn over a lot of rocks to find a single opportunity,” he says. “We’re one of a couple of handful’s worth of upper-echelon entities in this space. We’re in a niche of a niche.”

The “we” is basically Asbahi, a Denham Springs native, the son of Syrian immigrant parents and a former aspiring doctor. He operates essentially as a one-man band, though he contracts with two research analysts, and a handful of seasoned private investigators and forensic accountants. He spearheads each project he assigns to them and stays in close contact while they check out, say, a Chinese factory to see if it’s overstating its output, or comb through reams of earnings reports, comparing figures in tiny footnotes from one year to the next.

Asbahi got his start in the mid-2000s, after graduating from LSU with an MBA, a path he chose after realizing he did not want to follow in the steps of his pediatrician father. He set off for Wall Street at a time when the market was bullish, armed with a list of hundreds of hedge fund advisors he hoped to work for.

He ended up using connections from back home to get hired as an analyst with a New Jersey-based fund—partially owned by Walter Morales’ Commonwealth Advisors—that invested heavily in risky mortgage-backed securities and got into trouble after the market crash of 2008.

Though Asbahi didn’t have anything to do with the fund’s investments, he found himself out of a job once the market collapsed and more determined than ever to succeed. He began marketing himself as a consultant who was good at research and willing to help out doing whatever was needed. He ended up working for several firms, making good connections and getting invaluable experience.

He returned to Baton Rouge in 2009, creating a small research shop out of his mother’s house and, eventually, getting some investors to put their money with him in a small hedge fund. For a time, he had a partner, Ben Axler, CEO of Spruce Point Capital Management. But he bought Axler out in 2014. Three years later, he combined his research firm and his fund, which had been technically separate entities, rebranding as Prescience Point Capital Management.

Doing what he does from what, by Wall Street standards, amounts to the boonies, might seem like a disadvantage. Asbahi says if anything it only enables him to do his job better.

“I am very happy to be out of the Wall Street environment, away from the crowd,” he says. “I don’t want to be a part of a community where everybody is doing the same stuff. The only way we’ve been able to separate ourselves is by doing things other people are not even thinking about doing. Being away from there helps.”

Blistering reports

In the early years, Prescience Point did mostly negative research on companies it intended to short. Short sellers make money by borrowing shares of a stock they believe is headed south, then selling those shares with the aim of repurchasing them later at a lower price.

Part of the strategy involves publishing the reasons for the short sale with the intention of driving the stock price down. This can only be done after the investor has acquired shares in a company, not before. It’s perfectly legal and, say some, an invaluable service. It’s also widely despised, since most people only make money when stocks go up.

“Short sellers provide an important function,” says asset manager Fred Dent III of Dent Asset Management. “In a free market you want actors on all sides because that provides liquidity and the opportunity to exchange ideas, and in the market there are millions of opinions. Short selling is one of millions of opinions.”

Asbahi, who both invests heavily in his own fund and earns a management fee from his clients, stumbled into short selling by accident after he lost what he says was “a lot of money” with a U.S.-listed Chinese company. He began looking into the company to better understand what had gone wrong and how he had misjudged it.

“I realized these Chinese owners would come to the U.S. to raise money and the U.S. investors had no legal recourse against them and couldn’t exercise any control or agitate for change,” Asbahi says. “More importantly, we tried to figure out how not lose money again so we started to focus on this.”

The firm had several early wins with Chinese shorts, posting a 2011 gain of 69%. It followed with four straight profitable years. More significantly, perhaps, several of the Chinese companies identified by Prescience Point were eventually forced by financial regulators to stop trading and, in some cases, shut down.

Another significant milestone came in 2014, when Prescience Point shorted CB&I, which months earlier had acquired The Shaw Group for $3.2 billion. In a blistering report, Prescience Point alleged CB&I had inflated its earnings and was struggling with certain nuclear power plant contracts it had inherited from Shaw.

“The message was loud and clear,” the report read. “The Shaw acquisition had gone very wrong.”

At the time, CB&I shares were trading at more than $73 per share. Asbahi’s report predicted they would fall to less than $38. In 2017, CB&I was acquired by McDermott International for the equivalent of $17.30 per share.

“I’ve heard people criticize Eiad for the CB&I report,” say Lance Paddock, CEO of Thompson Creek Wealth Advisors. “Turns out everything he said was accurate. All those contracts, all those expenses—turns out they were being hidden and shuffled around. What he does is very important. Building out that kind of information and bringing it to market is a key part of price discovery in a market. If it’s all just blowing smoke up somebody’s skirt, what good is that?”

Fearless

It doesn’t always go so well. In late 2015, Prescient Point published a negative research report on a U.S.-listed Indian food company, Amira Nature Foods Inc., claiming the company was overstating its revenues. The company’s stock price fell by 75%, though it would partially recover.

Amira sued Prescience Point and Asbahi for malicious intent to defraud the company and its shareholders for their own personal gain. Such litigation is an inherent risk that comes with short selling, but it’s never a good thing and Prescience Point ultimately settled. Asbahi cannot disclose the terms the settlement.

But Prescience Point’s wins have outnumbered its losses and Asbahi’s clients are pleased with his performance. Denham Springs dentist, Dr. Cyndie Baker, invested the six-figure proceeds of a property sale with Asbahi in 2013. In the six years since, she has doubled her money.

It’s not investing for the faint of heart, she concedes. It’s risky, and there have been quarters when Prescience Point has been down. But Baker says the way Asbahi handled the bad cycles has impressed her more than when the fund is doing well.

“A couple of times when the fund dropped he called me in advance and told me not to worry about it, and said better days are ahead, and I was impressed,” Baker says. “My two institutional stock brokers never did anything like that. He’s brilliant. Besides, where else can you make 100% in six years?”

Those who know Asbahi attribute his success to several factors. He’s driven, highly intelligent and thorough in his research. He’s also fearless. To take on Wall Street analysts, fraudulent Chinese manufacturers and major public companies, you have to be because they fight back. They sue, trash you online, and, in some cases, have you followed, which Asbahi says happened to him after he targeted the Chinese companies.

“A couple of times when the fund dropped and he called me in advance and told me not to worry about it and said better days are ahead and I was impressed. My two institutional stock brokers never did anything like that. He’s brilliant. Besides, where else can you make 100% in six years?”

DR. CYNDIE BAKER, on investing with Eiad Asbahi

Also key, however, is the fact that Prescience Point is a boutique firm with a small investor base of only high-net worth individuals. There aren’t any pension funds or institutional investors to speak of, which gives Asbahi a lot of flexibility to engage in high-risk investing and taking very concentrated positions in companies. The flip side, of course, is that Prescience Point can only leverage so much at one time. At the moment, the firm has more long positions than short, which has a lot to do with the capital tied up in MiMedx.

There are other deals out there Asbahi would like to take on but he simply doesn’t have the bandwidth.

“Our pipeline is as promising as its ever been,” he says. “The limiting factor is not size but time.”

Tool in the toolbox

At the moment, Prescience Point is spending most of its time enhancing its reputation as an investment house with an expertise in ferreting out companies whose value is vastly out of step—on either the high or low side—with what the market believes it to be.

It’s also trying to hone its skills as an activist investor. The proxy war for MiMedx is new territory for the firm, both exciting and challenging. Prescience Point began acquiring shares in the pharmaceutical company in 2018 and eventually became its single largest shareholder.

“That actually gives us a lot of leverage,” he says. “You’ll see people go activist with maybe 4 percent to 5 percent.”

Asbahi then recruited several top-flight industry experts, willing to serve on the company’s board of directors. It was no small feat, “because this isn’t exactly Apple or Disney,” he says. But they’ve bought into the campaign, literally and figuratively, and own an additional 3% of the company’s stock. Altogether, it gives the group nearly 10% of the equity in MiMedx.

He also began reaching out to other shareholders of the company. Even before he started campaigning, he estimated 40% to 50% of them support his efforts.

In late May, he notched a significant win, when the company agreed to appoint all six of the Prescience Point-recruited candidates to its board. If approved by shareholders at the annual company meeting later this month, as expected, Prescience Point will have won the proxy war.

A statement issued by MiMedx announcing the “board refreshment plan” speaks to Prescience Point’s credibility and influence.

“The MiMedx board and current senior leadership team have been working tirelessly to … get the company back on track,” says Charles R. Evans, board chairman. “We are pleased to have worked collaboratively with Prescience Point to identify and add new directors who bring exceptional experience and track records to MiMedx.”

On the day of the announcement, MiMedx’s stock price went up 36%.

Will it continue to rise? It’s tough to say. Asbahi is obviously optimistic. Either way, the firm’s first foray into investor activism won’t be its last.

“This long activism on MiMedx is simply another tool in our toolbox, another arrow in our quiver,” he says. “We are developing new skills and this is a part of that. It’s the most fun thing that I’ve done.”