Thanks to the Gamestop trading frenzy at the beginning of the year, finding stocks with high levels of short interest that can be “squeezed” for massive profit on the long side may end up being one of the defining stock market plays of 2021.
Now retail investors hoping to take down hedge funds, as they did with Melvin Capital on Gamestop, are on the lookout for new candidates that may provide the same payoff.
It won’t be as easy.
When the Reddit crowd of WallStreetBets went after Melvin, some 140 percent of the float of Gamestop’s shares had been sold short, according to a Jan. 26 report by S3 Partners, which tracks the business. The firm calculated that other squeezable stocks included AMC Networks, with about 40 percent short interest.
Following the crowd into those shorts proved to be exceedingly painful for hedge funds. GameStop short-sellers have lost $6.3 billion so far this year, and its short interest has fallen to about 14 percent of the float, according to Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners. The losses for AMC short-sellers, meanwhile, are around $3.7 billion, with 19 percent of the float shorted.
After those debacles, short sellers grew more wary of shorting stocks with such high levels of short interest. The average short interest is now about 5 percent of the float, according to a new S3 Partners report.
None of the stocks that S3 Partners follows, including those with short interest greater than $100 million, have more than 50 percent of their shares short. The top 20 range is now between 28 percent and 48 percent.
Big 5 Sporting Goods, the California sporting goods retailer, has the most shares sold short, weighing in at 49 percent. The stock is up more than 125 percent this year. Next are two electric vehicle stocks: Nikola, with 39 percent, followed by Workhorse Group, with 38 percent. Workhorse’s stock is down about 60 percent this year, while Nikola’s has fallen 30 percent.
Other well-known shorts also make the list. Some 30 percent of the shares of Lemonade — which short seller Andrew Left targeted in early January — are still sold short. Lemonade is down 45 percent this year.
Left had less luck with his long call on Root Insurance, which he named as his best stock pick of the year when some 42 percent of its stock was shorted. Now only 29 percent of its stock has been shorted, down from a high of 80 percent earlier this year. The stock is down more than 66 percent this year.
Gaotu Techedu — the online Chinese education company that short sellers lambasted as a fraud for more than a year before the Chinese government clamped down on the entire sector — still has 28 percent of its float sold short, even though the stock has dropped to around $3, a 94 percent decline for the year.
“High short interest as a percentage of float is a factor in the ‘crowdedness’ of a shorted stock,” Dusaniwsky said. “Higher numbers can have negative effects on stock loan liquidity as well as trading liquidity.”
While they’ve scaled back their ambitions, short sellers still have had a brutal year. So far this year, they have incurred almost $160 billion in marked to market losses, a loss of 14.29 percent on average short interest of $1.12 trillion, according to S3 Partners.
And even with the stock markets in disarray in September — including some of the heaviest one-day drops of the year — short sellers barely added to their shorts. Short positions increased by $2.88 billion, a mere 0.25 percent, according to S3 Partners, which said that short sellers made $6.32 billion during the month.
