The Short Squeeze Investing Trick
Markets are a product of human emotion as well as rational calculation, so divisive “cult stocks” are subject to occasional bouts of mania. Tesla? We need you up at the front to help us illustrate the way to take advantage. Say, “squeeeeze!”
As sentiment swings and the optimists squeeze out the pessimists, a “short squeeze” can be created. It’s a strange but powerful market reaction to change, and looking for it has become an investing approach all unto its own!
Home-dental start-up SmileDirectClub was a hot tech unicorn until its market debut flopped last year. It closed the year down 62%, prey for short-selling investors looking to make a quick buck. Even today, most investors still heavily bet against it. It’s hard to believe that, according to market data collector S3 partners, SmileDirect is facing the same perfect storm of sentiment as Tesla did before surging 70%!
In shorting a stock, the investor promises to buy it at a future price, to sell at today’s price. The lower the stock drops, the bigger your gains. The higher it rises, the bigger your losses. Wherever it goes, closing your short position amounts to buying the stock. That ticks up the market price, so a ‘short squeeze’ is when crowds of panicking short-sellers dash for the exits, cut their losses, and moon the stock price. For those on the right side of the wager, it’s a free ride!
Delivery growth is what served as the catalyst for Tesla. SmileDirectClub is embracing a new business model. It’s going to be Smile-IN-directClub, partnering with many local dental offices instead of only mail-order. Shares have risen 50% since this was announced, and S3 Partners says there’s a vast short-sighted community of bears held captive in there.
Of course, the short-sellers won’t crack that easily. They have their own view of the future. SmileDirect is unprofitable, and going indirect to dental offices is certainly not without its risks. Investors without a vested interest can watch and learn. If the turnaround does work, bulls will beam from ear-to-ear. First, they got their call right. Second, the shorts got their call wrong!
