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Key takeaways
- Many new investors first heard about shorting stocks in 2021 when the meme stock rallies began, the topic remains relevant throughout the unprecedented events of last year.
- When you short a stock, you’re betting that its price will drop in the future. Hedge fund managers short stocks that they believe will decline in the future. The risk here is that the stock could have a rally.
- Short sellers had a profitable year in 2022 due to stock market volatility that led to many of the biggest tech companies dropping in value.
There’s no denying that 2022 was one of the most dynamic years in the stock market. We saw soaring inflation, aggressive rate hikes, and multiple stock market sell-offs.
We also witnessed a busy year for short sellers as they were able to reap profits while the markets tumbled. According to a report from data-analytics firm S3 Partners, short sellers reached almost $50 billion in gains in 2022 just from betting against some of the biggest tech companies. Many bears are optimistic there’s more money to be made in 2023.
We’re going to explore what it means to short stocks and discuss some of the most shorted stocks of 2022.
What is shorting a stock?
Before we list some of the most shorted stocks of 2022, let’s first look at what shorting a stock entails. Shorting a stock means that you’re betting a stock’s price will decrease in value in the future. In order to short a stock, an investor borrows shares of a stock, typically from a broker, sells them on the open market, and hopes to repurchase them at a lower price in the future. If the investor is successful in getting a lower price, they will have made a profit when they return the stocks to the broker or lender. Investors may have to pay interest to the broker in exchange for borrowing shares, and may have to pay commissions on trades.
The biggest risk with shorting stocks is that the stock price will go up. There could also be an unexpected bull run where the entire market goes up.
A common example you may have heard of is AMC. Hedge fund managers felt that AMC stock was overvalued and was going to drop in price, mainly because movie theaters were closed during the pandemic. These hedge funds started loaning shares from investors in hopes of buying them back when the price dropped. However, this strategy didn’t go according to plan. Reddit users banded together on forums like r/wallstreetbets and bought shares of AMC, pushing its price up.
During the meme stock rallies, we experienced short squeezes as retail investors grouped together buying shares of stocks like AMC and GameStop. A short squeeze happens when stock prices rise instead of dropping as predicted. When this happens, some short sellers attempt to cover their positions by buying the stock, pushing its price higher and potentially causing more short sellers to try and cover their positions.
What Are The Most Shorted Stocks of 2022?
Carvana. (CVNA)
We’ve written extensively about the drop in Carvana’s stock price as the used auto retailer saw its shares drop almost 100% in 2022. Looking toward 2023, the company’s future doesn’t look promising as some of Carvana’s largest creditors have formed a cooperation pact for debt restructuring negotiations. Many critics believe the company didn’t adequately prepare for the coming economic downturn. The company also faces the issue of used car prices dropping, meaning they have inventory that’s decreasing in value on a daily basis.
Carvana’s share price is down almost 98% from one year ago, with a current share price of $4.63.
Bed Bath & Beyond Inc. (BBBY)
If you’ve been following the meme stock rallies, it should be no surprise that this specialty retailer is on this list. Bed Bath & Beyond seemed like a no-brainer for short sellers this past year, with high equity debt and continued negative earnings. However, the company has been involved in short squeezes generated by retail investors, which have mitigated some of its more severe stock price drops. Still, whether or not the company can turn its business fundamentals around remains to be seen.
Bed Bath & Beyond’s share price is down about 84% from last year, hovering around $2.31.
Big Lots Inc. (BIG)
The home discount retailer has been struggling throughout 2022. In November 2021, the stock was trading at around $50 per share and as of early 2023, the price is hovering around $14.86, down 69.82% year-over-year. In September, DoorDash
CompoSecure (CMPO)
CompoSecure is known for designing and manufacturing metal, plastic, composite ID, and proprietary financial cards. Shares of CompoSecure have been steadily declining, and the stock price is down about 38% from last year with a price of $4.71.
Silvergate Capital (SI)
Silvergate Capital got stuck in the crossfire when FTX imploded in November because they were one of the main banking partners for Alameda Research and FTX. They were reported to have held $1 billion in crypto deposits from FTX, the latter being the creditor.
CEO Alan Lane has claimed that short-sellers were spreading speculation and misinformation to drive down the stock price. Some investors have sued Silvergate over its failure to detect money laundering. To make matters worse, Silvergate reported weak financial results for the third quarter, with a loss of $90.56 million for the quarter and $403 million for the year.
Silvergate stock is currently down about 88% from one year ago, with a share price of $17.27.
How much money is there in shorting stocks?
As we mentioned earlier, bears were able to cash in on the tech industry in 2022. According to data collected December 9, 2022, from S3 Partners, short sellers could cash in on $50 billion worth of paper profits from some of the biggest tech companies.
Here’s the breakdown for paper profits generated by short sellers from some of the most shorted stocks of 2022:
Tesla: $11.7B
Amazon: $6B
Meta Platforms: $5.7B
Carvana: $4.3B
Block: $4.1B
Apple: $3.9B
Microsoft: $3.7B
Advanced Micro Devices: $3.5
Sea: $3.2B
Nvidia: $3.1B
It’s worth noting that according to the data, many of the most-shorted stocks were also the most-owned stocks by retail investors. This means that many regular folks have taken a big financial hit during this bear market. While short sellers struggled during the bull market, where high valuations didn’t seem to matter, it looks like 2022 was a banner year.
What does this mean for investors?
Short-selling stocks is a risky investment strategy that should be reserved only for the most sophisticated investors who can afford to incur this magnitude of possible losses. While traders can make profits if the stock price continues to fall, there’s always the possibility of a rally. As we urge with any other investment, it’s essential to do your own due diligence.
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Source: https://www.forbes.com/sites/qai/2023/01/05/5-most-shorted-stocks-of-2022/