For much of the past three months, retail investors have been talking about the city on Wall Street.
Since mid-January, predominantly young and / or novice investors in Reddit’s WallStreetBets chat room have teamed up to buy shares and call options that do not make money in high-interest short-term stocks. Short sellers are investors who want to bring stock prices down. Although stocks are moving in both directions, short selling holds the added risk of losing indefinitely.
Image Source: Getty Images.
A successful short print requires the right recipe
The purpose for these small investors was to create a short-term pressure. This is an event where short sellers (mainly institutional investors and hedge funds) are pushed out of their position by a significant rise in the security against which they bet. As pessimists simultaneously rush the exit and buy stocks to cover their position, this exacerbates the upward move in a stock.
For example, short print was responsible for sending video games and accessories GameStop (NYSE: GME), cinema chain AMC Entertainment Holdings (NYSE: AMC), and Canadian marijuana stock Solar Growers (NASDAQ: SNDL) to the moon, metaphorically speaking.
But the dynamics of short-print are always changing, and what worked for GameStop, AMC and Sundial two months ago is unlikely to work now.
GameStop’s short-term interest (the total number of shares held short compared to the tradable shares known as the float), for example, fell from a three-digit percentage to 22% in mid-March. Meanwhile, AMC Entertainment and Sundial have a short interest of only 12% and 10% respectively.
The other ingredient needed for a short press is a long day to cover, also known as short ratio. The longer it takes short sellers to leave their positions, the greater the chance that they will feel trapped. When this ‘trap’ occurs, the price of shares is higher. Due to the extremely high daily trading volumes for GameStop, AMC and Sundial, short sellers could easily leave their position within hours should they decide to do so.
These three companies could hurt short sellers
Although GameStop, AMC and Sundial are no longer good candidates for short press, that does not mean that other potential off-radar stocks are not. The following trio of shares can all be prepared for pessimists.
Image Source: Getty Images.
Quickly
In the first place, content delivery and security specialist Quickly (NYSE: FSLY), which happens to be one of the fastest growing technology stocks. As of mid-March, 20.3 million shares were held short, representing 22% of the company’s float. More importantly, with an average daily trading volume of 5 million shares, it will take short sellers four full days to exit their positions. This is a great recipe for a short press.
What’s impressive about Fastly (unlike AMC, GameStop and Sundial) is that you’ll find industry growth to support the idea of a short print. As more businesses have switched to an online presence than ever before, the demand to deliver content quickly to end users is only expected to increase. With a use-based business model, Fastly could triple its sales in the next four years.
The Fastly business model has clearly shown the ability to grow with its customers. The dollar-based net expansion figures for the third and fourth quarters were 147% and 143%, respectively, indicating that existing customers spent 47% and 43% more than in previous quarters. The company also has a retention rate of 99%.
We only see the tip of the iceberg for edge cloud supplies like Fastly. Another extraordinary quarter of growth may be all that is needed to pull short sellers flat.
Image Source: Getty Images.
Intercept pharmaceutical products
Biotech stock Intercept pharmaceutical products (NASDAQ: ICPT) is another interesting candidate for short print. As of March, Intercept held 7.24 million shares short, accounting for nearly 26% of its shares. The key here is that it only trades about 1.16 million shares a day. This implies that it will take more than six trading sessions before short sellers leave their positions completely if Intercept’s share moves sharply higher.
The possibility of pressure will depend on experimental treatment of obeticholic acid (OCA) for non-alcoholic steatohepatitis (NASH). NASH is a liver disease that affects up to 5% of the US adult population and can lead to fibrosis, cancer or even death. It currently has no drug or therapy approved by the Food and Drug Administration.
On the bright side, OCA met one of its two co-primary endpoints in the late-stage Regenerate trial – a statistically significant improvement in fibrosis without exacerbating NASH. On the other hand, the high (and most effective) dose led to increased cases of itching (itching) and significantly more trial cases than the placebo. The FDA has sent a complete response letter to Intercept requesting additional safety data on OCA.
With the arrival of new trial data, Intercept can erase or confirm the thesis of short sellers. Even if OCA is approved for a small subset of the sickest NASH patients, it could easily turn into a $ 35 billion mark.
Image Source: Getty Images.
Root
Latest technology-driven insurance company Root (NASDAQ: ROOT) has the potential to put a brief pressure on pessimists. As of mid-March, Root owned 10.92 million shares, representing almost 41% of its shares. Since Root’s average daily trading volume is less than 3.2 million shares, it will take shortly before 3.5 sales days to complete your sales shortly.
The Root car insurance model is nothing short of what we have seen before. The company relies on telematics to inform the key safety features of managers before they become customers. Using information derived from the magnetometer, accelerometer and gyroscope in a user’s smartphone, Root can determine how safely or aggressively people are driving and provide them with policies based on these extensive metrics.
As you can imagine, the concept is making a lot of noise, but it is also currently causing significant losses. Root expects its operating losses to range from $ 505 million to $ 555 million in 2021, with the company significantly cutting its marketing campaign during last year’s pandemic. Again, Wall Street predicts a quadrupling of sales between 2020 and 2023, which is nothing to sneeze at.
A short push in Root could be caused by something as simple as the higher-than-expected sales growth, or possibly the company’s loss ratios would come in better than expected, confirming the data-driven operating model.
This article represents the opinion of the author, who may not be in agreement with the ‘official’ recommendation position of a Motley Fool premium advisory service. We are furry! Questioning an investment thesis – even one of our own – helps us all to think critically about investments and to make decisions that help us become smarter, happier and richer.