Last Friday, two Israeli stocks attracted attention on Wall Street: Oddity Tech (Nasdaq: ODD) and Mobileye (Nasdaq: MBLY). The first percentage increased by more than 20%, and the second by slightly less than 16%. On the face of it, there is no connection between the cosmetics company and the automotive technology company. Oddity Tech rose after announcing a raise in its guidance and the introduction of a share buyback program, while the reason for the rise in Mobileye was apparently positive expectations for the stock from Citi. But these two stocks have something in common: short sellers love them.
In short selling, a trader borrows shares, sells them, and later buys them back to return them to the owner. If the price of the security falls in the meantime, as the trader expects, he profits from this movement, but if it rises, he suffers a loss.
Sometimes, when short sellers make a mistake in their gamble against a particular security, a short squeeze is created, a situation in which several short sellers attempt to buy the security and close their positions. If there is a large short position in a security, even a small reason for it to rise triggers a tidal wave of buying and a jump in its price.
Short position in one out of every three stocks
This is the story of several prominent Israeli stocks on Wall Street. In mid-May, Oddity Tech was the Israeli stock with the highest short position in terms of its float (shares available for trading), at 37.6%. It was followed by insurance technology company Lemonade (NYSE:LMND) with 31.9%; Mobileye by 29%; solar technology company SolarEdge (Nasdaq: SEDG), 21.6%; and shipping company ZIM (NYSE:ZIM) by 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 single numbers. In general, a short position of up to 10% of the float is considered low, and more than 10% is considered high. The Israeli stocks mentioned above have short positions two or three times that.
“Stocks with high short positions are usually volatile, because otherwise it would be difficult to take a short position,” says Sergey Vaschenok, a senior equity analyst at Oppenheimer & Co. “Short selling is usually associated with stocks with high trading volumes, although That's not always the case Sometimes the company makes an offer and the float is very small because the shares are not listed for trading yet, and then the short position can be very high relative to the Mobileye position as follows: The float is not large, because Intel. It holds the most shares (88.3%) and the same goes for Oddity, where the float is also not very large.”
Stocks where the short position is relatively high have been very volatile in the past year. For example, ZIM has traded in a range of $6.4 per share to $24, a gap of 273%, while at SolarEdge the range is from $46 to $292, a gap of 535%. Changes in a stock's price, or at least the direction of the change, usually stem from internal or external factors affecting the company, but the activity of short sellers can amplify the move.
However, Vaschenok explains that the question of whether a short position brings volatility, or whether volatility brings selling, is more complicated than it seems. “It's not certain what the cause is and what the effect is,” he says. “Companies that attract short selling are generally those with volatile stock prices. There must be risk factors for the company, as well as many investors who are not financial institutions but speculators.”
He says there are two theories about companies with high short positions. “One is that stocks with a high short position have a high potential to close the position, which means the stock price can rise, and then investors buy in the hope that short sellers will actually close their positions and the stock price will rise. The second theory is that if there is a Short selling, it means that someone has checked the company Short selling is an expensive deal, because the interest rates on borrowed shares are high nowadays, and if someone is willing to take a decision in order to borrow shares and pay high interest on them, then it is assumed. He examined and found risk factors in the company that justified this move.
For example, “The business has been under stress for a long time, and last year the short sellers were right big time,” says Vaschenok at SolarEdge. “At the end of the day, the business, the business environment, and the performance of the company, but SolarEdge, even on its best days, When we recommended the stock and investors made a lot of money on it, she had a very high short position, so the short sellers weren't right.
“Over time, a stock can go up and down, but the short-seller thesis has to be true in the short term, because holding a short position for a long time costs a lot of money because of interest, and there are cases where the broker who lent him the stock can force it back.
“Ultimately, short sellers focus on stocks where 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 such a company is the next big thing, and others who think it is a passing fad.” ” Oppenheimer likes Oddity and Mobileye, which Vaschenok says “have great market potential and unique business models, but there's always someone who thinks otherwise.”
Short sellers disappear
Last week, Bloomberg reported that short-selling activity on Wall Street was at its lowest level in twenty years. According to Goldman Sachs, the number of short positions in stocks in the S&P 500 has returned to dot.com crisis levels, and the value of the assets of funds skewed toward short activity has shrunk.
“This decrease is due to two reasons,” says Vaschenok. “First of all, the market is going up, people have less appetite to try short selling, and even investors whose business is short selling, like Chanos (Jim Chanos, director of Kinicos Associates), are abandoning the field. Secondly, the current Interest rates have made short positions more expensive, and this is also one of the considerations that led to the decline.
Published by Globes, Israel Business News – en.globes.co.il – on June 10, 2024.
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