"Meme-stock mania," the wild moves of stock prices driven by retail investors which started with GameStop (GME) in January of this year, has been interesting. Nobody in financial media, and I would include myself in that group, wants to identify with the Wall Street traders who are seen as the other side in these battles. However, at the same time, nor do we want to wholeheartedly endorse massive manipulation of stocks that results in prices completely detached from any fundamentals or prospects, just because that detachment will inevitably result in some small-time traders getting quite badly hurt when those things come back into focus.
That being said, what gets lost in that a lot of the time is the fact that one of the things that makes a stock the target of the so-called “Reddit crowd” is actually aggressive manipulation in the other direction by Wall Street, and if you understand that, you can see some opportunities that can benefit from the short-term dynamics, but also have solid long-term prospects.
A good case in point would be PubMatic (PUBM).
PUBM is jumping again this morning after big gains yesterday, but the story of the stock since it went public in December of last year suggests that it is this move, not the big declines last month that are the return to reality. Yes, PUBM shot up over 350% from its post-IPO low to the high in March, but that move, unlike the big drop, was supported by the company’s performance.
Their first earnings report as a public company was a good beat of expectations and, most importantly, PubMatic showed then and in their second report, that they can achieve rapid growth while still making money. Did multiples get a bit stretched during that run up? Sure, but high multiples of earnings aren’t exactly rare in this market and could be said to be much more justifiable in this case than in some others, where companies have slower growth rates and/or negative EPS.
And yet what started as a rational retracement from a high quickly developed into a collapse, with short interest growing all the time, hitting 3.45 million shares, or 38.49% of the float last month. Even at that level, the selling continued, with some estimates putting the percentage of shares held short by the end of last week at around two thirds.
Short selling has a purpose in the market. It can help to identify weakness in a company or shares that are massively overpriced, but it can also be purely a trading tactic, just like the squeezes that target those short positions, and that looks to be the case here.
The kind of squeezes that we have seen in the likes of GME, AMC Entertainment (AMC), and a few others are only possible when there are overextended shorts to squeeze, and we should not forget that when criticizing manipulation by short squeezers. After all, the process of establishing those short positions is itself manipulative.
Selling a stock short to push down the price quickly becomes a self-fulfilling prophecy in a couple of ways. First, it creates momentum, which will act as a squeeze in itself. Those holding long positions have pain thresholds and stop loss levels just like short sellers, and if the selling is aggressive enough to hit a couple of those levels, acceleration in a downward move that squeezes longs can be just as spectacular as one seen in an upward direction when shorts are squeezed. Second, and much more significantly, it creates problems for the company whose stock is being targeted.
The stock market exists in theory to allow companies to raise capital, and their ability to do that is severely hampered when their stock is being sold aggressively. In addition to making share issuance almost impossible, it makes borrowing, even in the short term, difficult and more expensive, and can result in cash flow issues that weren’t issues before the selling started.
So, while a lot of short sellers like to see and paint themselves as heroes like those from the movie The Big Short -- basically, they see themselves smart people who see what others don’t and restore order to the market -- that isn’t always the case. Sometimes they are the ones who are doing the distorting and the reality is being injected by those who oppose them. That is in part why, while I have to this point avoided most of the high-profile meme stocks and despite the obviously high-risk nature of the trade, I bought PUBM this morning. However, I am a trader, not a campaigner, so the fact that I think the position will result in a decent profit was, of course, also a part of the calculation.
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