Investors love to back a winner — except for short-sellers. These contrarian traders prefer betting stocks will fall, and the further the better.
Many investors don’t like short-sellers because they are looking for a stock to fail. Yet, it’s a normal part of the market. Stocks rise and fall, and profiting from a stock’s decline isn’t bad. The short-sellers aren’t causing the stock to fall, the business is.
How short-selling works is an investor borrows a company’s shares and sells them. Sometime later, he buys them back — hopefully (for him) at a lower price. If correct, the seller pockets a profit. But if he is wrong, he could face limitless losses.
It is one reason I don’t short stocks, and I don’t recommend you do either. To paraphrase economist John Maynard Keynes: A stock can go higher for much longer than you can stay solvent. Short squeezes have wiped out many short sellers.
Of course, just because someone is betting against a stock doesn’t mean you should buy it — or short it! The stock could have serious problems that justify short-sellers expecting it to fall. But it could very well just be stricken by short-term troubles that will soon correct themselves.
Below are three stocks with the highest short interest. Let’s see if the shorts have it right or are risking losing their shirts.
Archer Aviation (ACHR)
Electric vehicle takeoff and landing aircraft manufacturer Archer Aviation (NYSE:ACHR) is a stock short-sellers are betting against big time. With the eVTOL leader’s float, or the shares outstanding available on the open market, at 202.6 million shares, 57.9 million — 28.55% — are sold short.
That is a lot, but based on Archer’s average daily volume of shares traded, the short interest ratio — also known as days to cover — is only 4.9. That means it would typically take about five days for short sellers to cover their position at current trading volumes to close out their position. The ratio is elevated but not ripe particularly ripe for a short squeeze. Usually, anything over seven days is considered a lot and could spark a squeeze.
It seems short-sighted (excuse the pun) to be selling Archer stock short. Admittedly, it has no real revenue to speak of, but that is not uncommon with companies literally building a new industry from the ground up. Archer needs to get Federal Aviation Administration approval to begin its regional air taxi service and is far along the path to certification. Archer expects to receive its Type Certificate next year that will allow it to fly. It also has powerful, deep-pocket backers like United Airlines (NASDAQ:UAL) and Stellantis (NYSE:STLA).
The latter is helping Archer build out a manufacturing complex in the United Arab Emirates. As soon as Archer gets FAA flight approval, it will simultaneously be approved to launch its business there.
Short-sellers might gain a few points between now and then but I wouldn’t want to be putting my money at risk betting against Archer Aviation going down.
Plug Power (PLUG)
Hydrogen fuel cell maker Plug Power (NASDAQ:PLUG) also has a lot of investors expecting it to fail. Short-sellers have a better chance here than with Archer for realizing a profit. For most of Plug Power’s existence, it has destroyed shareholder value, so betting on further declines is not out of the realm of possibility.
PLUG stock is down 44% in 2024, nearly 80% over the past year and more than 90% lower in the last three. Pretty much any time since the company went public, you could have made money betting against Plug Power. Some 29.9% of PLUG stock’s float is sold short with six days to cover.
The hydrogen fuel cell maker is positioning itself as the sole vertically integrated green fuel stock in the industry. It recently touted a $1.7 billion conditional loan guarantee from the Energy Dept. Unfortunately, there is less than meets the eye here. Conditional guarantees are not really guarantees unless Plug Power meets the conditions, which could be difficult for the company.
With a long history of diluting shareholders — it did so again just recently with another $200 million stock sale — the short-sellers are looking to make easy money.
SolarEdge Technologies (SEDG)
SolarEdge Technologies (NASDAQ:SEDG) sits somewhere between Archer Aviation and Plug Power. While it is a viable business selling residential inverters to convert the sun’s energy into usable electricity, it is also generating substantial losses. And in the high interest rate environment we’re in, those are likely to continue for the foreseeable future. Even hoped-for rate cuts by the Federal Reserve won’t do much to reignite demand for solar installations.
Some 30.5% of SolarEdge’s float is sold short. But that only translates into a short interest ratio of 2.3%. There is little likelihood of a short squeeze pushing short sellers out of their positions.
Like Plug Power, the inverter maker is having a rough go of it in 2024. SEDG stock is down 70% year-to-date. Yet, Wall Street is pretty upbeat about its prospects. A consensus target price of $43 per share implies a 56% upside inherent in the stock over the next year. It could be a bigger-than-anticipated rate cut, or a series of them before the end of the year, that ignites a rally in the stock — if not SEDG’s business.
I wouldn’t be betting against SolarEdge Technologies, though I wouldn’t be a buyer yet either.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.