Bearish short sellers—in Wall Street parlance—got their faces ripped off by Eastman Kodak stock over the past two days. It sounds brutal, but it’s common Street-jargon. It also appears to be a fair description for what just happened to the bears. The short squeeze has been epic.
Tuesday, Kodak (ticker: KODK) received a loan from the U.S. government to develop generic pharmaceutical drug ingredients. That kick started the rally. The stock rose 203% on Tuesday and another 308% on Wednesday.
Kodak stock was a popular short coming into the recent rally. Almost 6% of shares available for trading were sold short, which is about 5 times the average short interest ratio compared with stocks in the Dow Jones Industrial Average.
Short sales are bearish bets by investors who borrow stock they don’t own and sell it. If all goes well for the short sellers, shares can be repurchased at a lower price later and returned to the original holders. A short seller earns the difference between the cash brought in on the sale and the cash used to repurchase stock, less any stock borrowing costs.
Stocks tend to rise over time, making short selling hard. There is also the risk of a short squeeze, which happens when bearish investors all rush to cover short positions at once. Panic buying can feed on itself, sending shares higher. Short sellers, essentially, run for the exit door at once—they get squeezed in the door jamb.
It’s similar to what happened to Mr. Burns—an iconic Simpsons character—during a medical checkup. Burns, in a funny turn, had every disease known to man (and then some). The germs, according to his doctor, were getting stuck in the door of his body keeping Burns alive.
Germs, in this odd analogy, are the short sellers—they can’t get through the door.
The analogy is ridiculous, but, it’s apt in this instance. The fictional Simpsons series, often times, seems eerily prescient regarding coming U.S. events. The market, in a similar fashion, reflects the U.S. economy and can predict recessions or the success of new technologies. But when a stock rises almost 1,500% over three days, the market feels fictional—even satirical.
Short sellers started the week with a $3 to $4 million bet against the company. It seemed sensible. Kodak lost money, on an adjusted basis, in 2019. What’s more, shares had dropped about 40% a year over on average for the past three years—through the close of trading Friday.
Now the stock is at a new high. And with recent gains, short sellers have lost up to $50 million in a matter of days.
Of course, they have had ample opportunity to cover short bets—limiting losses below the maximum potential. More than 550 million Kodak shares have traded over the past two days. There are only about 44 million shares outstanding. The market capitalization of the company has turned over more than 12 times in two days.
Stocks just don’t trade like that. About 1% of General Electric (GE) stock, for instance, typically trades on an average day. For Apple (AAPL), a trillion-dollar market capitalization company, roughly 0.8% of shares outstanding trade each day.
The wild trading now has Kodak shares up more than 600% year to date, hardly comparable to the returns of the Dow Jones Industrial Average and S&P 500.
Trading will calm down eventually. That will likely lead to lower prices for Kodak stock. Where shares settle out, however, is anyone’s guess.
Kodak, at this point, has no analysts covering the company which means no target prices to help guide investors.
It’s an unusual situation on Wall Street.
Write to Al Root at allen.root@dowjones.com
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July 29, 2020 at 03:37AM
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Kodak Stock’s Rally Destroys Short Sellers. They’re Down $50 Million. - Barron's
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