Short-Selling Is Really Hard. Just Ask Citron Research

It's Friday, so let's go off the beaten path a bit and have some fun. Shorting is incredibly hard. Don't let anyone try and tell you differently. There are significantly more risks and costs involved in shorting. Losses are virtually unlimited. When a trader shorts a stock the most profit they can make is the amount of the initial short sale. Unfortunately, the losses can continue growing as long as a stock continues to move higher. Remember that when you short a stock you are borrowing the shares from someone else and selling them to the market. At some point, you'll be required to return (buy back) those shares. But the challenges don't end there. If a stock you are short pays a dividend, you will pay (not receive that dividend). Every day you hold a stock short, interest will accrue. For the largest and most liquid names, the interest is generally nominal, but a hard to borrow (short) stock or a volatile name could run anywhere from a 5% to over 100% per year in interest. Those numbers can add up quickly when you are paying an annual interest rate of 20%, 50%, 100%, or more. Even more challenging can be your ability to hold the shares while you wait for your bearish thesis to take hold in the market. Stocks can be called in, which means a trader can be forced to buy the shares by the close of business on the day they are called no matter what the price. If this happens en masse, we can see a short squeeze and a stock's value can rise dramatically in a matter of hours. One of the most well-known short trading firms on social media is Citron Research. Andrew Left, the company's Executive Editor, often appears on CNBC. He's a well-spoken gentleman whose tweets and words often solicit immediate market reaction in a stock he mentions. Citron's goal is to influence a stock. Like any other trader, they are in this game to make money and there's nothing wrong with that. Traders push their agendas and talk their books for that very reason. I've seen Citron make some fantastic calls, but also a few head-scratchers, so I went through the company's short calls from the past 10 months on Twitter to see how one of the most influential short-sellers has done thus far. I'll attach a bunch of charts below if you prefer visual versus verbal analysis. The Good I'll start with the good. Citron has been strong in the medical/biotech space. One could argue they own this space. Fantastic calls on Mallinckrodt , MiMdex Group , Ligand Pharmaceuticals , and PolarityTE deserve recognition. They've been top-notch calls grabbing 20%, 30%, and 50%+ gains. After a few stumbles early on in the cannabis space, Citron has found a home in this sector, too. Interestingly enough, the companies in this group are often smaller, easily influenced. They often lack institutional backing as well. Still, that doesn't prevent short-squeezes. Back on Sept. 4, Citron moved from long to short on Tilray . The big gains from the long position were quickly erased as the stock soared over 200% in a matter of days. While a few folks may have been able to keep their short, there were massive call-ins on Wall Street and many shorts were forced to buy their positions back at 100% or more than what they sold it for only days earlier. A similar instance happened with Cronos Group . Citron recommended a short on Aug. 30. The stock did fall some 40% before catching interest from Altria Group . Now the shares are up 70% from the end of August. To Citron's credit, they did throw in the towel on this one when the position was flat. The Bad For all the positives from Citron's biotech and cannabis trades, wading into technology and larger-sized companies has been tragic. Two of those names are providing painful reminders Friday on the challenges of short-selling. The Trade Desk was a name uttered in June 2018 that made me shake my head. I've written about this one often as it has been one of my favorite names to own and trade since 2017. TTD stock is currently up more than 125% from Citron's short call. That means if you shorted 100 shares around $85, your initial trade netted you $8,500 in proceeds, but you now have to spend almost $20,000 to rebuy those same shares. Or how about Wayfair ? The stock was called a short on April 2, 2018, then again on Aug. 28, 2018, and once more on Nov. 2, 2018. Those positions would have netted you losses of 20%, 62%, and 126%! Veeva Systems , another favorite of mine, was targeted as a short back on Dec. 4, 2018. Despite a flat S&P 500 since that day, Veeva has gone up nearly 20%. Netflix was hit with an investors must be blind as a Bird Box tweet on Jan. 11, 2019, but the stock is already up over 12%. If we extend our time frame back to the spring of 2018, we'll find names like Square and Shopify . While Shopify is net flat, it's not an easy or cheap borrow to hold for almost a year. Square has never been a profitable short since the April 30, 2018 tweet that targeted a $30 price tag. The short position is currently down 28%, but at one point was down 100%, pushing most investors past their max pain threshold. The Tech Longs Citron did try a few tech longs in the middle of 2018. Back in August, Citron predicted Twitter would make new 52-week highs. It never came close and Citron changed its tune four months later. Snap shares from May 31 never got close to Citron's upside target and now sit some 47% lower. On June 11, 2018, Fitbit was projected to go to $15, but the stock has done nothing but struggle. The tweet virtually top-ticked the stock, which now sits 21% lower. Here's the rub, Citron still does the shorting game better than most, at least of those in the public eye. They've had their share of big winners along with huge losers which gives folks some clear insight into how hard shorting truly is in the markets. If you can find a niche where you excel (cannabis and biotech in Citron's case), then I would maintain focus there rather than trying to make splashy headlines. The same goes for traders. If you find a few stocks you can read well, be patient and stay with those. There is no need to expand your lists unless opportunities complete dry or the wins stop coming. Have a fantastic weekend.

Short-Selling Is Really Hard. Just Ask Citron Research

Examining the influential short-sellers' big winners and losers provides important insights into trading and investing.

Columnist Conversation

Closing Some Positions

MRK

Adding Some Puts

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.