Last week, shares in German tech company Northern Data AG (NB2:GR) were slammed after Germany’s financial regulator, BaFin, filed a criminal complaint against the firm’s senior staff for “potential market manipulation.”
BaFin did not disclose any specifics in relation to the complaint, however, Northern Data has said that the complaint is related to a potentially misleading ad hoc release in 2019 surrounding the acquisition of US crypto miner Whinstone.
This development comes shortly after the company posted its unaudited financial results for 2020, which were not only delayed by several months but also well below the group’s previous guidance.
Were there any indications that Northern Data stock could be set to underperform? Definitely. Looking at the short selling data on NB2, short interest has been building up for months. Clearly, the short sellers were expecting the stock to fall.
Northern Data Ag: Short Selling Red Flags
If we look at a snapshot of the short selling data on Northern Data AG, we can see several red flags.
The first is that short interest is very high. As of 1 October, 722,400 shares were on loan, representing 26.744% of the company’s free float. Generally speaking, short interest over 10% is concerning.
The second is that the ‘Borrowing Activity Rating’ (BAR) is high at 10. BAR is a rating between one and 10 that provides a simple indication of the level of demand to borrow a given stock. The formula to calculate the BAR includes inputs from outstanding loan fees, new loan fees, new loan volume, and utilization rates. A BAR rating of 10 indicates a high demand to short the stock.
These two metrics tell us that short sellers are aggressively targeting Northern Data stock at present.
Short Sellers Were Expecting the Share Price Fall
What’s interesting, however, is that the attention from the short sellers is not a new thing. If we zoom out and look at the data over the whole of 2021, we can see that short interest has been building steadily here since around March.
In the image above, the solid orange chart represents the number of shares on loan over time. On 1 March 2021, the number of shares on loan stood at 55,977. However, since then, shares on loan have climbed steadily to reach 722,400 by 1 October. In other words, there has been a near 13-fold increase in the number of Northern Data shares on loan in the space of seven months. This kind of increase in short interest is certainly a red flag.
We can also see that the number of transactions on the short side has increased significantly since March. On 1 March, there were just 15 short transactions. However, on 1 October, the number of short transactions hit 95.
Overall, the short selling data on NB2 clearly shows that short sellers have been expecting the stock to underperform for a while. As is often the case, the short sellers got it right. And the short selling data was able to provide invaluable insights for market participants.
No Insider Buying
It’s also worth touching on the insider transaction data here. Looking at this data, we can see that there has been no insider buying this year, even though the stock experienced a near-50% drop between mid-February and late-September. In fact, there has been no insider buying at all since the company listed on Xetra in October 2018 (it was known as Northern Bitcoin AG at the time).
For a company that has repeatedly told investors that it is well positioned for growth, this could potentially be interpreted as another red flag. If insiders are genuinely excited about their companies’ prospects, they tend to buy stock, especially if the stock is under pressure.
“We have created the basis for above-average and, above all, highly profitable growth for many years in extremely fast-growing areas such as bitcoin mining, artificial intelligence, blockchain, big data analytics, IoT or rendering.” – CEO Aroosh Thillainathan, December 2020
Data Is a Powerful Tool for Active Investors
In summary, our data on Northern Data AG provided some clues that the stock could be set to underperform.
The fact that short interest was building steadily was one red flag. No insider buying, despite the fact that the stock had pulled back significantly, was potentially another.
By incorporating this data into their analysis, active investors could have potentially avoided big losses here.