Short Selling

In the Nasdaq sell-off the Short Sellers are cleaning up

2022 has been a painful year for tech / growth investors. Year to date, the tech-focused NASDAQ Composite index is down around 25%. Many stocks on the NASDAQ have fallen much further. Coinbase, Rivian, and Upstart are a few examples. This year, these stocks are down 75% or more.

Yet there is one group of investors that is making a lot of money in this environment. We’re talking about the short sellers, of course. These sophisticated investors, who profit from falling share prices, have been absolutely cleaning up in 2022 (after a big year in 2021) as growth stocks have tanked.

Here’s a look at six growth stocks the short-sellers have made huge gains on in 2022.

Upstart Holdings

Let’s start with FinTech company Upstart Holdings (UPST: US), which offers an artificial intelligence-based lending platform.

When we last looked at the short-selling data on Upstart, on April 8, we noted that short interest here was very high at around 33%. We also noted that short-selling activity had increased exponentially since the start of February, with the number of shares on loan rising roughly 1,016%, and that utilization a measure of demand on the short side – was 100%.

Since that report on April 8, the short-sellers have made a ton of money on this stock. That’s because, on May 11, Upstart’s share price crashed 60% on the back of its Q1 earnings report. While Q1 earnings beat forecasts, guidance for 2022 was weak. Meanwhile, the company told investors that it had $604 million worth of loans on its balance sheet and that delinquency rates had risen.

Clearly, the short sellers were anticipating some problems here.

Affirm Holdings

Another stock in the FinTech industry that the short-sellers have cleaned up on in 2022 is buy now pay later (BNPL) firm Affirm (AFRM: US).

When we last analyzed the data on Affirm, on April 27, we highlighted the fact that short interest was 18%. We also highlighted the fact that the number of shares on loan had jumped from 8.3 million at the start of February to 26.6 million on May 10. This told us that short sellers were ramping up their downside bets here.

Since that article, Affirm’s share price has fallen from $31.21 to just $14.63, as of May 10, losing around 53% of its value. The stock has been hit by Upstart’s poor guidance, as well as a price target cut from analysts at Deutsche Bank, who slashed their target to $35 from $70.

Robinhood Markets

A third FinTech stock that the short-sellers have gained from this year is Robinhood Markets (HOOD: US), which operates a popular investment and trading platform.

We last looked at the short interest data here back on January 19. At the time, we saw a number of red flags, including the fact that short interest was 78% and utilization was nearly 99%.

Since that article, Robinhood’s share price has declined from $14 to around $8.15, as recorded on May 10, losing about 40% of its value.

The loss has been driven by a slump in revenue as trading volumes have softened and price target cuts from brokers.

Rivian Automotive

Moving away from the FinTech sector, the short-sellers have also generated big profits in the electric vehicle (EV) sector.

One stock they have profited from here is Rivian Automotive (RIVN: US), which came to the market last year amid much fanfare.

When we last covered Rivian, on April 11, we thought it was concerning that 78.7 million shares were on loan. This represented 49.5% of the free float. We also thought the utilization rate of 100% was concerning.

At the time, Rivian’s share price was near $40. However, since then, it has slumped to nearly $20.

The fall in the share price here is the result of a number of factors including supply chain and production issues, poor sentiment towards highly-valued unprofitable companies, and the fact that Ford sold 8 million Rivian shares after the IPO lockup period expired.

Arrival

Also in the EV space, the short-sellers have profited from British company Arrival (ARVL: US), which went public via a SPAC deal in 2021.

We last analyzed this EV stock on February 9 when it was trading near $4. At the time, we noted that short interest was high at 20% and that the number of shares on loan had jumped by around 60% in a month.

Since that article, Arrival’s share price has fallen to around $1.60, losing roughly 60% of its value. The stock has been hit by supply chain concerns and deteriorating sentiment towards highly-valued, early-stage EV companies.

Peloton Interactive

Finally, another good example of a growth stock the short-sellers have profited from in 2022 is fitness company Peloton Interactive (PTON: US).

When we last examined the short-selling data on Peloton, on January 19, we saw one major red flag and that was that short interest was rising rapidly. In the space of around three months, the number of shares on loan had risen by around 100% to 26.4 million.

At the time, the share price was near $24.22. However, since then, it has fallen to $12.34, netting big gains for the short-sellers.

The share price weakness is the result of bigger losses and the fact that the CEO recently told investors that the company was ‘thinly capitalized’.

Short selling data: A powerful research tool

The main takeaway from all of this is that short-selling data can provide invaluable risk management insights for active long investors.

If a stock has a high level of short interest, or its short interest is rising rapidly, it can pay to approach the security with caution. These scenarios signal that the short-sellers have spotted a major risk, and that they believe the stock is set to fall.

Of course, the short sellers don’t always get it right. And there have been times recently where the short-sellers have got their calls badly wrong (e.g. GameStop). However, in general, the shorters tend to have a pretty good track record when it comes to identifying overvalued stocks that have substantial downside risk. So, it’s worth keeping an eye on their moves.

You can find out more about 2iQ’s short interest data here.

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