The widely used strategy to make money from stocks is to buy low and sell high. You buy at the lowest price point possible, then unload at a much higher price to maximize profits. However, some investors profit from falling share prices.
These people, or so-called short-sellers, have high-risk appetites. Instead of price appreciation, the strategy is to bet against stocks and hope their values drop.
A simple guide to short-selling
Shorting a stock is the opposite of the “buy low and sell high” principle. You sell first, then buy later. It starts with borrowing a stock you don’t own, usually from a brokerage firm. The investor is bearish and believes the price will drop and can be bought at a depressed price. In this transaction, the difference between the sell and buy prices is the profit.
To illustrate, assume ABC stock trades at $2 then you borrow 100 shares to sell. When the price falls to $1, you buy 100 shares for $100. You return the 100 shares to the lender or brokerage firm and keep the difference, or $100, as profit. Professional traders identify the stock to share before engaging in this high-risk, high-reward strategy.
Target No.1
The meme stock phenomenon in 2021 pitted inexperienced investors against short-sellers. BlackBerry Limited (TSX:BB) was among the popular meme stocks in Canada and a target of short-sellers. While the cybersecurity stock is down 15.5% year-to-date, it has risen 22.2% to $3.97 per share in the trailing 30 days.
Market analysts’ 12-month average price target is only $3.99 (+0.5%), but their low-price target is $3.15, a potential 26% drop. Short sellers are also speculators; given these forecasts, BlackBerry could be on their radars.
On December 10, 2024, the $2.5 billion intelligent security software and services company and TTTech Auto launched its new MotionWise Schedule for QNX Software Development Platform 8.0. The platform aims to accelerate software development for Software Defined Vehicles (SDV).
However, short-sellers should beware. BlackBerry might have a legitimate growth driver in the evolving automotive landscape. Furthermore, the company is in the process of achieving the Federal Risk and Authorization Management Program (FedRAMP) High Authorization. The stock could rise if the Joint Authorization Board (JAB) grants the authorization.
Target No. 2
CAE (TSX:CAE) could be ripe for the taking by short-sellers despite its leading position in the aerospace and defence industry. The $10.5 billion company specializes in simulation technologies and training services. At $33.07 per share, the stock is up 15.6% year-to-date.
However, CIBC downgraded CAE from outperform to neutral early this month. According to bank analysts, favourable secular tailwinds have yet to reflect in the stock’s performance. Market dominance and the record backlog are the positives, while the negatives that could bring the price down include slower pilot training demand.
In Q2 fiscal 2025 (three months ending September 30, 2024), net income declined 11.2% year-over-year to $52.5 million. Still, its President and CEO Marc Parent, said CAE’s future is exceptionally bright, given the $18 billion adjusted backlog.
Risky strategy
Short-selling is only for professional traders. While the strategy offers huge profits with proper timing, losses could be enormous if the position falls below the brokerage’s minimum capital requirements.
