Short sellers tend to be well-informed, high-conviction traders. If they are targeting a stock, it can pay to approach the security with caution.
In this report, we are going to highlight some bearish short selling activity at Nel ASA (NEL:NO). Nel is a Norwegian renewable energy company that provides solutions for the production, storage, and distribution of hydrogen from renewable energy sources. Its hydrogen solutions cover the entire value chain from hydrogen production technologies to hydrogen fueling stations, enabling industries to transition to green hydrogen. The company is listed on the Oslo Stock Exchange and currently has a market capitalization of NOK 26.2 billion.
Nel ASA: Short Selling Activity
Nel is attracting a high level of interest from short sellers right now. Our short selling data shows that, at present, 89.7 million shares are on loan. That represents about 11.4% of the company’s free float, which makes Nel one of the most shorted stocks in the Nordic region at the moment.
What’s interesting is that there has been a sharp increase in short selling activity since the beginning of May. We can see that since early May, daily transactions on the short side have increased by about 65%. This is concerning. Research has found that sharp increases in short selling activity tend to be followed by a period of negative abnormal returns.
High Valuation and Disappointing Results
The interest from short sellers here is most likely related to the stock’s valuation. Last year, Nel generated revenue of NOK 652 million. That means that at its current share price and market cap, the stock has a trailing price-to-sales ratio of about 40, which is very high.
There is also the issue of profitability. Last year, the group generated an operating loss of NOK 414.5 million, up from a loss of NOK 253.6 million in 2019. Meanwhile, in Q1 of 2021, the group reported an operating loss of NOK 98.2 million (versus NOK 86.9 million in Q1 2020), and a pre-tax loss of NOK 579.9 million, following a negative fair value adjustment related to the shareholding in Everfuel.
It’s worth noting that Nel’s Q1 results, posted on 4 May, missed expectations. Revenue came in at NOK 156.9 million, well below the consensus estimate of NOK 203.3 million. Q1 EBITDA loss of NOK 74.3 million was larger than the consensus estimate of NOK 66.7 million.
Given the high level of short selling activity here, we think caution is warranted towards Nel stock right now. We see the high short interest figure as a red flag.