Short sellers are getting squeezed in the stock of Nikola, which has rapidly become one of the most heavily shorted automotive stocks in the U.S. The recent trading action is a warning on just how heated the bull vs. bear debate has gotten in such a short time.
Nikola (ticker: NKLA) shares have been on a tear, up more than 100%, including Tuesday’s premarket gains, since the stock went public in a merger with a special-purpose acquisition company on June 3. Positive news about product development and partnerships have helped drive shares higher, but bad bearish bets by short sellers may be contributing to the rise as well.
Short sellers borrow stock and sell it, hoping to profit from falling prices. And the shorts have been quick to jump on Nikola stock. Short selling data provider S3 analytics says more than 5% of all shares available for trading have been sold short. That’s a lot. The average short interest ratio for stocks in the Dow Jones Industrial Average is about 2.1%.
The speed of short selling is noteworthy. Nikola, a startup company that plans to market fuel-cell-powered long-haul trucks, has been a publicly traded entity in its current form for only about nine days. In addition to the amount of stock sold short, stock borrowing costs are another signal to investors regarding how aggressive short sellers have been.
Holders, of course, don’t lend out their stock to short sellers for free and Nikola stock is particularly expensive to borrow. Right now, it costs short sellers more than 240% of the stock’s price to borrow shares, a process typically managed by brokers.
It’s an incredible annualized number. It means if short sellers were to keep short positions on their books for an entire year, they would owe holders 2.4 times the original stock price. To make money shorting a stock costing that much to borrow means prices have to fall quickly.
Borrowing costs are one reason shorting stocks is typically seen as riskier than simply owning stocks. Another factor contributing to heightened risk is the potential profit of a typical short sale is smaller. Stocks can go up a lot over many years. Stocks sold short—in conventional thinking—can only fall to zero.
For bears, the borrowing costs are a warning. High costs raise the risk of a squeeze. A short squeeze—when prices rise rapidly creating large losses for short sellers—can happen when bears rush to cover positions all at once.
For bulls, the short interest data is a warning that not all the recent gains have been driven by company fundamentals. That is something for even the most bullish investors to consider.
Nikola isn’t unique. Investors appear to struggle with eco-car technology. Stock in electric-vehicle pioneer Tesla (TSLA), China’s EV maker NIO (NIO) and Nikola are the three most heavily shorted car-maker stocks trading in the U.S., according to S3.
Valuation must have something to do with it. Tesla trades for about 85 times estimated 2021 earnings. Nikola and NIO aren’t expected to make money next year.
Ford Motor (F), General Motors (GM) and Fiat Chrysler Automobiles (FCAU) shares, for comparison, trade for 14.9 times, 8.6 times and 6 times estimated 2021 earnings, respectively.
Nikola stock was up 3.4% around 9 a.m. Easter time. Activist investors Jeffrey Ubben disclosed a stake in the company on Monday, boosting investor sentiment. S&P 500 futures were up 3%.
Write to Al Root at allen.root@dowjones.com
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June 16, 2020 at 08:26PM
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Nikola Stock Quickly Became a Short-Selling Magnet. That’s a Warning to Bulls and Bears. - Barron's
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