Last Friday, two Israeli stocks attracted attention on Wall Street: Oddity Tech (Nasdaq: ODD), and Mobileye (Nasdaq: MBLY). The former shot up by more than 20%, and the latter by just under 16%. On the face of it, there is no connection between the cosmetics company and the autotech company. Oddity Tech rose following an announcement that it was raising its guidance and introducing a share buyback program, while the reason for the rise in Mobileye was apparently a positive forecast for the stock from Citi. But these two stocks do have something in common: short sellers love them.
In a short sale, the trader borrows shares, sells them, and later buys them in order to return them to the owner. If, as the trader expects will happen, the price of the security drops in the meanwhile, he gains from the move, but if it rises he is exposed to a loss.
Sometimes, when short sellers err in their gamble against a certain security, a short squeeze is created, a situation in which many short sellers are trying buy the security and close their positions. If there is a substantial short position in a security, even a slight reason for it to rise leads to a tidal wave of buying and a jump in its price.
Short position in one in three stocks
That is the story of many prominent Israeli stocks on Wall Street. In mid-May, Oddity Tech was the Israeli stock with the highest short position in relation to its float (shares available for trading), at 37.6%. It was followed by insurtech company Lemonade (NYSE: LMND), at 31.9%; Mobileye, at 29%; solar energy technology company SolarEdge (Nasdaq: SEDG), at 21.6%; and shipping company ZIM (NYSE: ZIM), at 17%.
These are very high short positions. In other Israeli stocks, such as Wix (Nasdaq: WIX), Check Point (Nasdaq: CHKP), Nova (Nasdaq: NVMI), Camtek (Nasdaq: CAMT), and CyberArk (Nasdaq: CYBR), the short position as a percentage of the float is in the single digits. In general, a short position of up to 10% of the float is considered low, and of more than 10% is considered high. The Israel stocks mentioned above have short positions two or three times that.
Sergey Vastchenok, a senior equity analyst at Oppenheimer & Co., says, "Stocks with high short positions are usually volatile, because otherwise its hard to make a short position. Short selling is usually associated with stocks with high trading volumes, although that isn’t always the case. Sometimes a company makes an offering and the float is very small because the shares have not yet been listed for trading, and then the short position can be very high in relation to the float. Mobileye’s situation is like that: the float isn’t large, because Intel holds most of the shares (88.3%). The same applies to Oddity, where the float is also not very large."
Stocks in which the short position is relatively high have been very volatile in the past year. ZIM, for example, has been traded in a range of $6.4 per share to $24, a gap of 273%, while in SolarEdge the range is $46 to $292, a gap of 535%. Changes in a share price, or at least the direction of change, usually stem from internal or external factors affecting the company, but the activity of short sellers can magnify the movement.
Vastchenok explains, however, that the question whether the short position brings in train the volatility, or whether volatility brings the short, is more complicated than it seems. "It’s not certain which is the cause and which is the effect," he says. "Companies that attract short selling are generally those with volatile share prices. There has to be a trigger of risk factors for the company, and also many investors who are not financial institutions but speculators."
He says that there are two theories about companies with high short positions. "One is that the stock with a high short position has considerable potential for closing of the position, meaning that the share price could soar, and then investors buy in the hope that short sellers will in fact close their positions and the share price will rise. The second theory is that, if there’s a high short position, this means that someone has checked the company. Short selling is an expensive transaction, because interest rates on the borrowed shares are high at present, and if someone is prepared to take a risk, to borrow shares and pay high interest on them, he presumably checked and found risk factors at the company that justify the move."
On SolarEdge, for example, Vastchenok says, "The business has been under stress for a long time, and in the past year the short sellers have been right big time. In the end, the business, the business environment and the company’s performance, are what count. But SolarEdge, even in its best days, when we recommended the stock and investors made a great deal of money on it, had a very high short position, and then the short sellers were not right.
"Over time, a share can rise and fall, but a short seller’s thesis has to be right in the short term, because holding a short position for a long time costs a lot of money because of the interest, and there are instances in which the broker who lent him the shares can take them back by force.
"In the end, short sellers concentrate on stocks about which there are differences of opinion, stocks of companies that are not boring, that have unique business models and are creating something new. There are those who think that such a company is the next big thing, and others who think that it’s a passing fad." Oppenheimer likes Oddity and Mobileye, which Vastchenok says "have large market potential and unique business models, but there’s always someone who thinks otherwise."
Short sellers disappearing
Last week, Bloomberg reported that short selling activity on Wall Street was at a twenty-year low. According to Goldman Sachs, the number of short positions on stocks in the S&P 500 has gone back to the levels of the dot.com crisis, and the value of the assets of funds that tend towards short activity has shrunk.
"The decline is for two reasons," says Vastchenok. "First of all, the market is rising, and people have less appetite for trying short selling, and even investors whose business is short selling, such as Chanos (Jim Chanos, manager of Kynikos Associates), are abandoning the field. Secondly, current interest rates have made short positions more expensive. That’s also a consideration that has led to a decline."
Published by Globes, Israel business news - en.globes.co.il - on June 10, 2024.
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