You probably already know that you can buy stock in a company, wait for the share price to rise and then sell those shares to make money. But did you know that you can make money off of a company’s share price falling? This is what you call “shorting” a company, basically betting on a company to fail so that its stock value drops. Short sellers like David Einhorn and Sahm Adrangi are well known for their activist short selling, digging deep in their investment reports.
Short selling allows investors to sell what they don’t own.
Short sellers borrow the stock from a broker and then immediately sell the stock at its current market price. The short seller will wait for the stock price to decline, buy those shares at a lower price and then repay the loaned stock to the broker. The difference between the sale price and the purchase price will be the short seller’s profit. For example, you think Sally’s Spicy Dog Food’s (a fictitious company) share price will fall because its ghost chili pepper-flavored dog food will kill some dogs. You short 100 shares at $50/share, then a week later some dogs die and the share price drops to $5/share. You buy back 100 shares at $5/share and make $4,500 gross profit ([$50-$5] x 100 shares). But if the ghost chili pepper-flavored dog food ends up being a big hit and dogs love eating it and the stock price rises, you’ll end up losing money on your short bet because you’ll have to buy back the shares at a higher price than what you originally borrowed for.
Short selling is huge in the financial industry.
Unless you work in finance, follow investing news, or have watched the movie The Big Short, you probably won’t be very familiar with short selling or short-selling investment firms. Many hedge funds have taken their shorts public. For instance, in May 2008, David Einhorn, founder of Greenlight Capital, publicized his short on Lehman Brothers at an investment conference. Einhorn claimed that Lehman was taking too much risk and had discrepancies in their numbers in SEC filings. Several months later, Lehman Brothers declared bankruptcy. In 2014, Bill Ackman of Pershing Square Capital Management made a 3-hour long presentation on his $1 billion short on Herbalife, calling the nutrition company a pyramid scheme. Three years later after his presentation, he is still battling the company, albeit with put options. Another firm that’s known for short selling, Kerrisdale Capital, took short selling one step further and raised $100 million for a fund just to bet against a single stock, DISH Network. In 2016, Kerrisdale published a short-thesis report on DISH and set up a website to publicize its report, which argues that the media company was going to lose its main spectrum assets in 2020 and will result in a lower price.
Pershing Square and Kerrisdale Capital are just a few firms that are known in the financial community for short selling. With markets at all time highs and ever more companies at nosebleed valuations, more investment management firms are emerging that become known better for their shorts than their longs.
CNBC Reports on Sahm Adrangi Recent Short
In recent news, Sahm Adrangi’s latest Kerrisdale report shows that the firm has taken a short position in the Eastman Kodak Company, and will benefit if Kerrisdale’s predictions are right and its share price falls. The recent venture into crypto-currency is predictable hype if you ask Sahm, and their attempt at chasing the ICO craze is hollow. You can read more about the report from Sahm Adrangi on CNBC.