My style of short selling is very different to typical short sellers - at it simplest I see stocks as under-priced currency options if you think a currency is likely. For me, shorting weak dollar trades in 2011 made loads of sense. The problem for me is that unlike previous cycles, the dollar has stayed “strong” from ten years now. This change in currency behaviour is why I don’t run a fund anymore.
Despite me having a very different style of short selling, I still remain in touch with a few short sellers (like the cockroaches they refuse to die even after a 15 year bull market). I will not mention their names, unless you are an allocator looking for short exposure, then drop me a line. One of them mentioned a stock that I don’t remember looking at, but rang a bell - SMCI US - Super Micro Computer Inc. A quick look at the chart made me think - wow this sucker is volatile.
Straight off the bat, I noticed this stock had a high short interest at 17.5% of the float. That’s quite high, and makes short selling very tricky. One of the first problems with high short interest is that a long seller can not sell until they have recalled their borrow. That is from a flow basis, the short seller needs to be squeezed, before the owner of a stock sells. Sometimes a stock with high short interest can still be liquid, but if we have seen a recent spike in short interest then it is best avoided. Sadly, this is the case with SMCI - where short interest has cone from 50m shares at the start of the year to 100m now (see bottom chart).
I started looking at SMCI US, and then I remembered why it rang a bell. It was accused of putting spyware into Apple phones a few years ago. I would have considered US tech restrictions on semiconductors, plus these claims of spying for the Chinese government as making SMCI a dead business.
But even back then, SMCI US was a difficult short. It recovered quite quickly from its sell off in 2018 - which should have been a warning to short sellers that something else was at play. That something else was that it acts a distributor for Nvidia chips - which has meant that business has done very well. Shorting this stock in 2018 on the back of trade wars, spying accusations, or even just fears of a recession would have made sense - but was totally wrong. Short selling sucks.
Another more straightforward short selling disaster is Carvana. This was a stock that did very well during the Covid boom, but then collapsed as interest rates spiked.
It looked like a business that was going bust, so short sellers piled in. At its peak in 2021, short interest was only 10m shares, but reached a high of 50m shares in 2023, right at the lows. Carvana has returned to sales growth, and is now profitable. The shares are up 400% this year.
I add these to stocks to my file of short selling graveyards. They join such stocks as China Evergrande, a now bankrupt company, which was the biggest short in China in 2016. After the first Trump election, China choose to stimulate, and Evergrande short sellers were annihilated.
If you still want to short sell despite the above (and other stocks like GME or AMC, or even the biggest short in the US for many year - Tesla), then I offer you a piece of advice. Never short popular shorts, and always try to short a stock that is already falling. Good luck out there.
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