Short Selling

Short Selling: A Look at 2iQ’s Top Signals in 2021

Short selling data can provide valuable risk management insights for investors. Typically, short sellers are well-informed, high-conviction traders. If they are shorting a stock, there’s usually a very good reason they are doing so.

In 2021, short selling data proved to be a very effective risk management tool. Over the course of the year, many heavily-shorted stocks went on to lose 50% or more of their value. With that in mind, here’s a look at some of our top short selling signals from 2021.

Workhorse Group Inc

One of our best short signals in 2021 was from Workhorse Group (WKHS:US), an American company that is in the process of developing a range of all-electric delivery trucks and delivery drones. Here, we noted in June that short interest was very high at 45.7% and that utilization – which measures demand from short sellers – was also elevated at 95.4%. At the time, the company – which was targeted by short seller Hindenburg Research in 2020 – had just posted a very disappointing set of Q1 results so we saw the high level of short interest here as a bearish signal.

In hindsight, our bearish call on Workhorse Group was timed very well. Between the date of our article in June and the end of the year, WKHS stock fell from $16.90 to $4.36 – a decline of 74%. This decline was the result of investigations by the US Securities and Exchange Commission (SEC) and the Department of Justice (DoJ), the departure of the CFO and COO, the recall of vehicles, and poor results.

Company' price chart - Workhorse Group Inc

It’s worth pointing out that today, short interest at Workhorse Group is still very high at 35.2%. This indicates that short sellers see further downside from here.

Lordstown Motors Corporation

Sticking with the electric vehicle (EV) sector, another top short selling signal came from Lordstown Motors Corp (RIDE:US). It’s an EV company that is developing an all-electric pick-up truck. Here, we flagged in May that short interest was high at 31% and that utilization had climbed to 98%, up from 50% in March. We also noted that borrowing costs had climbed from 1% to 12% in the space of just a few months. We saw this short selling activity as very bearish.

Looking back now, it was right to be bearish on RIDE stock. Between the date of our coverage and the end of the year, the stock slumped from $9.58 to $3.45 on the back of production delays, poor results, an investigation from the SEC, and the resignation of the CEO and CFO.

Company' Price Chart - Lordstown Motors Corporation

Like Workhorse Group, Lordstown still has very high short interest today. Currently, 38.5 million shares are on loan, which represents 31.8% of the free float.

China Evergrande Group

Turning to China, in August we flagged up some concerning short selling activity at property developer China Evergrande Group (3333:HK). Here, we pointed out that short interest was elevated at 20.9%. We also noted that utilization had spiked from 53% to 88% in the space of a few weeks. This indicated that short sellers were ramping up their downside bets dramatically.

China Evergrande’s share price had already taken a hit in the lead up to our article on the back of the company’s liquidity issues. However, it continued to lose value over the remainder of the year, falling from HKD $5.81 to HKD $1.59. This represented a decline of about 73%. This means the short sellers generated huge profits from their short positions here.

Company' Price Chart - China Evergrande Group

It’s worth noting that while short interest at China Evergrande has declined since our report, it is still relatively high at 13.6%. This indicates that the short sellers potentially see further downside here.

Yalla Group Ltd

In May, we flagged up some bearish short selling activity at Yalla Group Ltd (YALA:US), which operates a social networking and entertainment platform across the Middle East and Africa. It had recently been targeted by short sellers Gotham City Research and Swan Street and we thought it was concerning that the stock had a utilization rate of 99.5% and a cost to borrow of 23.7%. These figures indicated that demand for the stock from short sellers was very high.

Yalla stock performed poorly in the second half of 2021 on the back of weak results, and the share price ended the year at $6.71. This represented a decline of around 60% from the share price at the time of our article.

Company' Price Chart - Yalla Group Ltd

Oatly AB

In July, we highlighted some concerning short selling activity at oat milk company Oatly AB (OTLY:US). It had recently come to the market via an Initial Public Offering (IPO) and retail investors had piled into the stock, pushing its share price up. We noted that short interest had climbed significantly between mid-June and late June and that on July 14, there was a massive spike in the number of shares shorted.

In hindsight, the short sellers were right here. Between the date of our article and the end of 2021, Oatly’s share price slumped from $19.45 to $7.96, as investors realized the valuation was too high. This represented a decline of 59%.

Company' Price Chart - Oatly AB

Robinhood Markets Inc

Finally, in September, we flagged up some bearish activity at online broker Robinhood Markets Inc (HOOD:US). Here, we thought it was concerning that utilization was very high at 99.94%. We also thought it was concerning that the cost to borrow stock was an eye-wateringly high 93.42%. These figures indicated to us that short sellers were very interested in the stock.

At the time of our article, Robinhood’s share price ($42) was elevated as the stock had been caught up in the ‘meme stock’ craze. It didn’t take long for the stock to come back to earth, however. With user growth at the company slowing, the stock fell sharply late in the year and ended 2021 at a price of $17.76. This represented a decline of about 58% from the share price at the time of our article.

Company' Price Chart - Robinhood Markets Inc

It’s worth pointing out here that short sellers continue to target Robinhood stock aggressively today. At present, around 79% of the free float is being shorted.

Short Selling Data: A Powerful Risk Management Tool

In conclusion, these short selling signals show that short selling data can add a lot of value for active investors from a risk management perspective. By keeping an eye on metrics such as short interest, utilization, and cost to borrow, investors can get a better idea of institutional sentiment towards a stock. This can help them make much more informed trading decisions.

Of course, while short selling data can be a powerful tool, it should not be the sole determinant of an investment decision. Short sellers don’t always get it right. As with most forms of alternative financial data, short selling data is best used in conjunction with other data as part of an investor’s overall research process.

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