Swaggy's Top Stonks - Top Short Interest Plays
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Swaggy's Top Stonks
Together with... VIG
October 31, 2021
Welcome newcomers to Swaggy's Top Stonks and thank you for subscribing.
Today I'll be breaking down short-interest stocks and the unusual cyclicality of the play.
Today's Letter
Market Update - Earnings
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Short Interest Report
Trending Tickers
Market Update - Earnings
Half your stocks got obliterated this week and yet the SPY continues to inch higher all while HODLing onto big-tech for dear life. This go-round Apple (AAPL) and Amazon (AMZN) have succumbed to supply chain woes as both fell several percent in post-earnings trading last week.
When does this supply chain nonsense end? I remember when I was a young boy in Bulgaria and this all started (that was a Vlad Tenev reference)... Anyways, we do have another full week of earnings coming up with lots of action on the horizon. Here's the earnings watchlist.
Tuesday
Corsair Gaming (CRSR) - BMO
AMC Entertainment (AMC) - AMC
Activision Blizzard (ATVI) - AMC
Wednesday
Roku (ROKU) - AMC
Qualcomm (QCOM) - AMC
Skillz Inc (SKLZ) - AMC
Fastly (FSLY) - AMC
Etsy (ETSY) - AMC
Thursday
Moderna (MRNA) - BMO
Datadog (DDOG) - BMO
DigitalOcean (DOCN) - BMO
Square (SQ) - AMC
Pinterest (PINS) - AMC
Uber (UBER) - AMC
Airbnb (ABNB) - AMC
MercadoLibre (MELI) - AMC
Peloton (PTON) - AMC
Cloudfare (NET) - AMC
Friday
DraftKings (DKNG) - BMO
Coinbase (COIN) - BMO
What to look for?
A few points to look out for if you have a position in some of these companies.
Corsair Gaming (CRSR): Last quarter CRSR was down on a slow-down in growth as they begun comparing quarters in FY 2021 over 2020. Most lock-down/pandemic stocks have raised the bar, in terms of expected growth, and now need to reach a little higher to out-perform.
AMC Entertainment (AMC): One of WallStreetBets' favorite stocks. The company diluted shares as things were heating up several months ago. This is one of the biggest plays of the year that originally took off from WSB hype. The stock is already trading at short-term lows so will be interesting to see where this ends up.
Qualcomm (QCOM): Semi-conductor company Qualcomm had very strong performance in late 2020 due to the surge in processor needs. Since then they've been unable to meet demand due to supply issues. IMO it's well-known that supply chains won't be resolving over night and is expected to be an on-going thing. I will be interested in hearing what management have to say about what the future looks like in terms of supply getting back to equilibrium.
Fastly (FSLY): Fastly under-performed in their last quarter and the stock eventually saw a 30% decline when all was said and done. This big-time growth stock, similar to Datadog (DDOG), needs to impress this time to get back on track. This is why growth stocks can be risky. While they continue to grow 90% YoY they can easily 10x in a few years, but as soon as the music stops and signs of a slowdown emerge they can lose a third of their valuation in a short amount of time, Fastly was an example of this not long ago.
Square (SQ): Popular FinTech app, Square, has been in limbo for the last 6 months. After seeing very strong pandemic-infused growth the company has somewhat stalled at $250 share. Great company, but might need time to grow into it's valuation. I will be listening to the earnings call or reading the transcript shortly after.
Pinterest (PINS): Is on everyone's radar after the mis-guided PayPal fiasco. Pinterest originally saw a 20% decline in share price last earnings after the company acknowledged a reduction in monthly active users on the platform. For a company categorized as a growth stock a decline in MAUs is not something investors want to hear.
Peloton (PTON): Peloton's earnings last quarter were also messy. The company cited internal issues and inefficiencies that cut heavily into margins and then announced a $400 reduction in price of their core Bike product. PTON also incurred larger than expected costs associated with the treadmill recall. The company has heavily shifted their focus toward the subscriber side of the business and will be interesting to see the adjustments they made from last quarter.
DraftKings (DKNG): Cathie Wood's ARK ETFs hold a lot of DraftKings as the funds have a high conviction in DKNG's business model. Shares of DKNG have been flip-flopping in the $45-55 range over the last 6 months. The company will need to show solid performance in daily active users and display there is no slow-down from the re-opening over the summer months. Another metric to watch for is the revenue per active user on the platform. DKNG will need to show that users continue using the platform, thus increasing revenue per user.
Coinbase (COIN): COIN had a good showing in their last earnings report. Strong growth driven by a surge in crypto-trading. It will be interesting to watch the numbers this time around.
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Short Interest Report
Swaggy has done research into short-interest stocks and has found something noteworthy to share. It goes without saying short-interest plays are some of the riskiest of them all, so please do your own research/DD before entering any positions. Why are short-interest plays risky?
1. Generally low-float, low liquidity names.
2. They are shorted for a reason, analysts have deemed their business model completely useless in today's society.
3. Big players who are short these names do not like losing money.
Having said that, the above recipe can also make for some explosive moves to the upside should any highly-shorted name display anything remotely close to a turn-around story, and who doesn't love an under-dog, like Lebron James in the new Space Jam.
Why does Swaggy like the alternative asset class of short-interest stocks? Mainly for the above reasons, but also because most of the names have been hit over the head with a shovel. Beaten down stocks can, at times, prove to be solid entry points. That is of course if they don't go to zero, which is never guaranteed.
Example: You have stock X with a dying business model. We don't know they are dying, but analysts think it's appropriate to label them as so. Stock X was once trading at former glory of $50 per share, but after a decline in revenues, profits, and being highly shorted, the stock is now trading at $10. At this point our max loss is if the company goes bankrupt and shares go to $0. However, our max gain could be the stock returning to it's former self. In this case max loss = 100%, max gain = 400%. A high-risk, high-reward play.
If we look back at previous short-interest "cycles" it might seem we are nearing the next cyclical event. How do I know this? I don't, I am 100% speculating and you should never trust what strangers have to say on the Internet. Moving along, here are several things I found in my research.
Let's look at two categories of charts. The first category will be some of the main names we saw participate in short-squeeze events this year. Let's use GME, AMC, and BB for this one.
I've circled the areas where GME squeezed and the rest followed suit. To be exact, here are the dates they squeezed (after the main event in January):
February 24
May 24 - Starting Monday with a follow through to Friday
August 24
Are you seeing the same pattern that I am seeing?
The next category will be some of the lesser-known short-interest plays that made it's way onto popular forums like WallStreetBets, but never reached the level of fame as the others did. I'm picking at random here, but let's use SDC, WOOF, and ROOT.
Although these lesser-known tickers did not experience the same magnitude of squeeze, they did follow the trend.
Let's check out the SwaggyStocks Sentiment charts for these names. I could list all these tickers' sentiment charts, but this is a newsletter and not a story book so I'll keep things within limit. Here's a look at the BlackBerry "SwaggyStocks" sentiment chart and see how sentiment vs share price has performed YTD.
I've highlighted again the last three quarters where the share price saw a squeeze. The squeeze is always followed by large increases in chatter.
I'm not saying these names *will* squeeze again, but the opportunity is there and I would rather be prepared with a very small position rather than getting in during the hype/FOMO and eventually getting hit with that reversal in share price. Almost every time the share price spikes to an unreasonable level the trend is that it goes back down.
Being prepared = Good
FOMO = BAD
Which leads me to the conclusion... Are these buy programs pre-calculated? Are shorts trying to cover a certain percentage before the end of quarter? Big losses in one quarter is perceived to be a lot worse relative to the same amount of losses dispersed over several quarters, at least that's what I make my wife's boyfriend out to believe.
A potential theory (and speculation) is that shorts may still be underwater, covering slowly at end of quarter and as the stock price has slowly been falling. Someone who might be short the stock could also have a pre-determined "no buy zone" that is essentially a limit to what share price they can cover their positions (buy shares back). For example, if they were short AMC at $10 and AMC shot up to $50, a lot of trouble would brew with that 400% loss. Covering means closing the position and realizing the loss, but perhaps they think they can wait it out and cover a partial position back in the $30s for only a 200% loss.
This is similar to the meme of traders becoming long-term investors after a huge decline in share price. Now they must HODL their position to regain some profitability back. The opposite *may* be happening on the short side.
Step 1: Cover % of short position. Low liquidity means share price temporarily moons to a price no longer in the suitable "buy area" to be able to cover.
Step 2: Hype calms down, share price goes through a reversal and then a slow bleed over the next 2 months.
Step 3: Share price yet again reaches an acceptable level to begin closing positions and realizing a loss and then we get back to step 1.
Remember, I know less than nothing and you should not take my advice on this because I have absolutely no evidence, but it makes for an interesting newsletter.
So what stocks am I looking at? Here's a complete list of short-interest stocks that are chatted about on WSB. Short-interest data has been pulled from ShortSqueeze.com, and may not be completely accurate as this data changes frequently.
*Denotes stocks that aren't high short interest, but follow the movement anyways.
What the colors mean on the "Shares Float"
Green = Float < 150 million
Orange = Float Between 150-500 million
Red = Float > 500 million
The shares float is how many shares are available for trade. A lower number means less shares and generally more potential volatility.
How is Swaggy playing it?
Like I previously mentioned, these high short-interest stocks are very risky and very volatile. Disclosure: I do not have a position in any of the stocks from the list above, however, I may be entering a position this week. Two stocks that I like are the BlackBerry (BB) and Palantir (PLTR) trade because in my opinion they are more than just short-interest names. Based on that fact those tickers are a way to limit the amount of volatility you see relative to a high-short interest name, but will also gain you some potential exposure to the short-interest meme-stock craze (if it does happen again).
WallStreetBets - Most Mentioned Equities
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