A Nikola hydrogen-fuel station.
Courtesy of NikolaNikola stock rallied 11.4% on Monday after starting the day down as much as 10.5%. Any 20% intraday swing is huge. Nikola is a popular short, and a short squeeze could be partly responsible for the rally, but one data provider hasn’t seen the shorts rushing to cover yet. In fact, they are adding to bearish bets.
To go “short,” bearish investors borrow shares and sell them, betting on near-term price declines. If prices fall, the bears can buy back stock at a lower price, return the borrowed shares, and pocket the difference.
A short squeeze happens when the bearish bets don’t work out as intended. Bearish investors rush to cover, creating a flood of buy orders and pushing stock prices higher. Often, high short interest—the amount of stock sold short compared with the total amount available for trading—is associated with higher share-price volatility.
Almost 7% of Nikola stock (ticker: NKLA) available for trading is sold short. The average percent of stock sold short for the Dow Jones Industrial Average is roughly 1%.
And the popularity of a Nikola short trade is rising after Hindenburg Research published a negative report about the company last week alleging among other things that the company overstated its technical prowess to investors. “Shares shorted have increased by 1.34 million shares,” according to a report issued by short interest data provider S3 Analytics. Still, that doesn’t account for the substantial rally.
“While trading was very heavy in [Nikola], this has not been a short side led market,” S3 said. “Trading was overwhelmingly due to long sided activity.” For S3, long-sided activity includes existing longs selling, new longs getting in, and day traders moving in and out of the name in response to price volatility.
Although short sellers might not have added substantially to recent trading volatility, there is a warning to short sellers embedded in the S3 report. The cost to borrow Nikola stock is rising. Short sellers have to pay to borrow stock and the cost rises as stock to short gets harder to find.
“Non-insider [Nikola] holders are predominantly retail based who are not active lenders of stock,” S3 wrote. “The lack of supply [of stock to short] and an increase in short selling demand is illustrated by the fact that new stock borrows are going at the 25% to 30% fee level today.”
To put on a new Nikola short, a bearish investor would have to commit to paying 25% to 30% of the value of the short on an annualized basis. That is pricey.
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“We will probably see a short squeeze in [Nikola] very soon if its stock price continues to shrug off bad news and climb on good news,” S3 wrote. “At the moment the short squeeze is just sitting at the top of the hill and building up potential energy.”
Nikola stock was down 6.7% Tuesday morning after Bloomberg reported Monday evening that the Securities and Exchange Commission might be looking into Hindenburg’s claims. The SEC declined to comment on any investigation.
Nikola told Barron’s, “On September 11, Nikola’s legal counsel proactively contacted and briefed the [SEC] regarding Nikola’s concerns pertaining to the Hindenburg report. Nikola welcomes the SEC’s involvement in this matter.”
Hindenburg responded to a request for comment about SEC investigations saying, “Nikola’s response has holes big enough to roll a truck through.”
What investors can expect in the immediate future is more stock trading volatility. A lot of uncertainty has been created by the short report and the claims exchanged by both Nikola and Hindenburg.
Over the past five trading days Nikola stock has moved up or down more than 10% each day. The stock, however, is flat over that period through Monday’s close. The S&P 500 and Dow Jones Industrial Average, for comparison, are up 1.6% and 2.6%, respectively, over that span.
Write to Al Root at allen.root@dowjones.com
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September 15, 2020 at 09:56PM
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Short Selling Isn’t Seen as a Big Factor in Nikola’s Stock Swings - Barron's
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