Short-sellers have invited the wrath of millions on the internet, causing one of the biggest short squeezes in the history of financial markets. Year to date, GameStop short sellers alone have lost close to $5 billion, according to a report. The army of retail investors, day traders and “YOLO investors” are now paying a lot of attention to other stocks that are shorted by major hedge funds. Despite the inherent risks and misunderstandings linked to it, short-selling is a proper investment strategy that has its rationale, thesis and roots. Unlike the common opinion, short-sellers are not looking to make profits by ruthlessly targeting random companies without any reason. Short-selling involves speculating on the decline of a stock based on its valuation concerns, internal fraud, financial vulnerabilities and other problems. Usually, hedge funds and institutional investors engage in short-selling strategies for both speculation and hedging. They short positions in certain stocks or sectors to hedge their long positions in other stocks (see 25 Biggest Activist Short Sellers).
Full Of Risks
However, short-selling strategy is risky, especially when used in a bull market. Looking at the current situation of the Wall Street short-sellers, legendary economist John Maynard Keynes’ famous adage comes to mind: "The market can stay irrational longer than you can stay solvent."
The market might be irrational to the short-sellers, but it sure is driving them to the verge of unacceptable losses. Why is short-selling a risky approach? The stock market in the long run almost always tends to go up, while short-selling is a bearish investment strategy that is betting for the decline of a stock or sector. Short-selling is often best for sophisticated investors who know the ins and outs of the companies they are shorting. Short-selling is highly risky for individual investors because there’s no limit on losses you could incur. For example, when a stock is shorted, and investors are already buying that stock, its price goes up. Short-sellers start buying that stock to cover their position and minimize losses, resulting in a “short squeeze.” If you buy a stock, you can only lose 100% of your money (in case the stock goes to $0). But if you short a stock, there’s not limit to potential losses as there is no ceiling for a stock’s price. To borrow the phrase of Reddit investors, it can rise “to the moon.”
Full of Rewards?
And yet short-selling has made hedge funds and expert investors extremely rich and profitable. Last year, Pershing Square's Bill Ackman made $2 billion in profits just by betting against the market, based on his prescient forecast: “hell is coming.” Last year, short-sellers made close to $50 billion in profits in just 7 days amid the coronavirus-triggered selloff. There were hundreds of short bets that paid off in the year. Click to read the Top 10 Activist Short Calls That Paid Off in the First Half of 2020.
The GameStop episode exacerbated the problem for the hedge fund industry. The industry's reputation has already been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Underperforming Stocks Targeted By Short Sellers
Image By peshkov - Adobe Stock
In this article we will take a look at top 10 underperforming stocks targeted by short-sellers. Our list is based on the worst-performing stocks over the last 12 months that have the highest short interest.
Short % of Shares Outstanding (Jan 14, 2021): 9.75%
Baudax is a Pennsylvania-based pharmaceutical company known for its ANJESO injection, which is used to manage moderate to severe pain. The injection received FDA approval based on data from three Phase III clinical trials.
Baudax stock is down a whopping 84% over the last 12 months. Just 7 hedge funds tracked by Insider Monkey held stakes in the company, as of the end of the third quarter.
Short % of Shares Outstanding (Jan 14, 2021): 15.69%
California-based Zogenix develops treatments for rare diseases. Its lead product is Fintepla, a treatment of seizures associated with Dravet syndrome. The company is also known for MT1621, an investigational deoxynucleoside substrate enhancement therapy for the treatment of inherited mitochondrial DNA depletion disorder thymidine kinase 2 deficiency.
Short % of Shares Outstanding (Jan 14, 2021): 18.16%
Callon Petroleum is an oil and natural gas company focused on the acquisition, exploration and development of high-quality assets in West and South Texas. In November 2020, Callon posted a Q3 Non-GAAP EPS of $0.64, beating the Wall Street by $0.55. Revenue in the quarter totaled $269.71 million, beating the consensus estimate by $20.86 million.
As of the end of the third quarter, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital owns 996,611 shares of the company, worth $4.8 million.
Callon shares are down 52% over the last 12 months.
Short % of Shares Outstanding (Jan 14, 2021): 19.33%
Corbus Pharmaceuticals Holdings, Inc. focuses on the treatment of rare, chronic, and serious inflammatory and fibrotic diseases. The company’s primary product and lead candidate is lenabasum, which is a synthetic oral endocannabinoid-mimetic drug to resolve chronic inflammation and fibrotic processes. In November 2020, the company missed analysts’ estimates for its Q3 results, posting a 52% year-over-year decline in revenue.
Short % of Shares Outstanding (Jan 14, 2021): 19.45%
Sabre is a Texas-based is a distribution systems provider for air bookings in North America. In 2007, the company was acquired by Texas Pacific Group and Silver Lake Partners. Sabre started trading publicly-trading company in 2014. In December 2020, Sabre shared rallied after Morgan Stanley upped the stock rating from Equal-Weight to Overweight, and also increase its price target to $14 from $7. In the same month, Mizuho also upgraded Sabre from Underperform to Neutral, citing the slow travel industry recovery.
But Sabre shares have lost half of their value over the last 12 months. Here is what RF Capital said about SABR in its 2020 Q2 investor letter:
“Sabre Corporation (SABR) – This holding never became a large position in our portfolio. However, SABR was a profitable investment for us. We bought at an average price of $4.52/share and sold at $7.38/share. We sold our shares due to the quick gain and the company’s increasing leverage on the balance sheet. The airline and travel industries continue to be challenged, so we wanted to reduce our overall exposure as well.”
