The stock market has been in tears since it hit a bear market low in March 2020, and many investors are completely taken aback by the strong performance. With so many uncertainties in the picture – the COVID-19 pandemic, geopolitical tensions, and economic devastation for tens of millions of Americans – it doesn’t seem entirely normal that the market could rise.
Plus, there are some individual stocks that have produced absolutely incredible returns. Gains of nearly 750% for You’re here (NASDAQ: TSLA) are just the start of a long list of companies whose stocks have generated multi-digit returns in a single year. That’s enough to make value investors cringe.
When investors believe that a stock is ahead of itself, they can sell its stock short. Short selling is a bet against an action. You borrow shares from a shareholder through your broker, sell them, and then hope to buy them back at a lower price and return them to the lender.
Short selling works very well in a stock market crash. But it is risky. There is no theoretical limit to the amount you can lose on a short sale. Just ask one of the many investors who sold Tesla shares short in 2020.
Lately short selling activity has picked up and dozens of stocks currently have a considerable portion of all of their available stocks sold short. Below, we’ll take a look at three popular stocks for short sellers that have already hurt those who bet against them – and could completely destroy short sellers’ portfolios in the coming year if things go well for their businesses. .
Proteins of plant origin have received a lot of attention in the food industry, and Beyond meat (NASDAQ: BYND) has been the leader in this fast growing niche. Shares of the stock rose 65% last year, as the stock’s price rebounded from falling after its IPO in mid-2019.
However, short sellers are betting heavily against the stock. As of December 31, nearly 13.7 million shares of Beyond Meat have been sold short. That’s nearly a quarter of the company’s available free float, or 56.2 million publicly traded stocks, according to Morningstar.
Beyond Meat has seen its sales skyrocket over the past two years. But investors were amazed when the plant protein specialist said year-over-year revenue grew by less than 3% in the third quarter of 2020. This has led some to conclude that the boom in meat substitutes is over.
Still, the trends that sparked interest in plant-based meat substitutes are still firmly in place. The disruption caused by the pandemic has altered customer behavior, reducing trips to restaurants offering Beyond Meat products and putting pressure on business performance. That hasn’t stopped Beyond Meat from forging new partnerships and looking to grow its scale as quickly as possible, even at the expense of current sales and profits. If more investors adopt Beyond Meat’s long-term strategy, it could keep the stock higher and seriously hurt short sellers.
HR (NYSE: HR) could be the epitome of a successful turnaround story. The company formerly known as Restoration Hardware almost closed in the early 2010s, but since then RH has reinvented itself as a high-end home furnishings retailer. Its business strategy included building entire gallery locations and an innovative membership model that gave buyers an added air of exclusivity and status.
Sales were strong, with third quarter revenue up nearly 25% year over year. The stock reacted accordingly, more than doubling in 2020. Yet the gains also put sellers short in the picture, with 2.78 million stocks sold short representing about 18% of HR’s available free float. , according to Morningstar.
The bearish argument is that RH is ahead of itself. The stock has quintupled from its lows in March 2020. A multiple of earnings greater than 60 is particularly rich for a company in a retail industry that has suffered dramatic disruption and challenges for several years.
however, HR’s vision always resonates with customers, and the retailer tapped into pent-up demand from high-income consumers who focused on improving their lifestyle at home. Even once the pandemic is brought under control, the urge of high-end buyers to keep their luxurious homes will not go away – and if RH continues to tap into that demand, its sales and profits could rise enough to justify a price tag. even higher action. .
Virgin Galactic Holdings
Finally, few stocks have more people betting against them than Virgin Galactic Holdings (NYSE: SPCE). The Richard Branson-inspired space tourism firm had 43.7 million shares sold short as of Dec.31, or about 64% of its nearly 69 million shares float. Still, the stock more than doubled in 2020.
Bet against Virgin Galactic may seem like a safer bet than with most companies. For Virgin Galactic to be successful, it must complete a series of uneventful test flights. Then it needs to start offering commercial flights to its customers on the waitlist, while continuing to move towards a much more ambitious flight schedule. All the while, if just one thing is wrong with a launch, it could cause a potentially catastrophic backlash for the business.
Again investors excited about the potential of Virgin Galactic go beyond space tourism. Using the technology and knowledge it has already developed could help Virgin Galactic deliver more conventional air travel at supersonic speeds, shortening transoceanic flights which currently take 12 to 15 hours to only two. at four o’clock. The market for this type of travel is much larger than space tourism, and it is behind much of the valuation of Virgin Galactic.
Virgin Galactic is going through a critical period and the stakes are high. However, if it succeeds in its test flights, the stock could record huge gains that would crush short sellers.
Be careful if you bet against these stocks
There is no guarantee that these three companies will be successful. Short sellers may be absolutely right to bet against them.
However, investors must weigh the risks against the odds of being right. If things go well for these three companies, short sellers will have nothing more to celebrate in 2021 than in 2020.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.