Lately, short sellers have been all over the news, thanks to the Gamestop (NYSE:GME) frenzy that has taken over Wall Street. The mania was kicked off when Reddit investors identified unusually high short interest in GME, and decided to buy up the stock to create a short squeeze. The result was at least two hedge funds–Melvin Capital and Citron–having to cover their shorts at extreme losses.
For many people, this may seem new and exciting. But short squeezes are as old as short selling itself. As long as there is enough demand for a stock, it can rally and force short sellers to cover their positions. In fact, one of the two hedge fund bosses involved in the Gamestop saga got caught in a short squeeze several years ago. Holding a massive short position in Shopify Inc (TSX:SHOP)(NYSE:SHOP) stock, he was forced to cover at a loss. In this article, I’ll explore how that happened–and what it means for investors.
The time Andrew Left shorted Shopify
Shopify has long been a top performing TSX stock. Rising by more than 100% annualized, it has solidly beaten the TSX, the S&P 500 Composite Index, and even the NASDAQ. But before this year’s pandemic-driven earnings surge, not everybody was convinced. Some people thought that SHOP was facilitating MLM schemes, and would inevitably fall after the FTC took action against the company.
One of those subscribing to this position was Andrew Left of Citron Research. Calling Shopify a Herbalife-like business opportunity scheme, he gave it a $60 price target. Not only did he think the stock was going to decline in value, he himself bet on it happening, taking a short position. However, SHOP continued rallying, forcing Left to cover his position at a loss. Today, it trades for about $1,400 on the TSX and $1,100 on the NYSE.
Another Shopify short squeeze?
The rise of Gamestop has led to a lot of investors seeking out short squeeze opportunities. The term short squeeze is surging on Google Trends, and articles on the topic are all over financial media. Basically, investors are seeking out excessively shorted stocks and hoping to profit–either by promoting the stock or waiting for the boost that comes when shorts cover their positions.
Unfortunately, Shopify is not a good candidate for this strategy today. The stock may continue rising, but it won’t be because of short sellers covering. According to MarketBeat, only about 12% of Shopify’s shares are short. That contrasts with 60% for Gamestop. If all of those short Shopify covered their positions today, the price bounce would only be minimal.
That’s not to say SHOP won’t continue rallying, however. Growing revenue at about 97% year over year and posting positive GAAP earnings, it has the fundamentals to back up its momentum. But short sellers aren’t going to provide the boost. They seem to have learned their lesson about this company–just ask Andrew Left!
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Andrew Button has no position in any of the stocks mentioned. David Gardner owns shares of GameStop. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify and Shopify.