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The shorts that shocked the markets

The shorts that shocked the markets

The high risk but potential for huge rewards in short selling have long imbued the practice with an air of mystery. There are countless stories of traders flexing their investigative muscles to try and make massive gains on companies’ misdeeds and misfortunes — and some of them even pull it off. We’ve identified some of the biggest short-selling wins, and hardest losses, of the twenty-first century.

This article was originally published in our Opto Magazine. You can purchase your copy via our Opto Shop.

 

November 2000

Enron

Jim Chanos’ Kynikos Associates took a short position in energy giant Enron in November 2000, when the stock’s price sat at $90 and analysts were handing out price targets of $130.

Chanos had become sceptical of Enron’s use of the “Mark to Model” and “Mark to Mark” accounting methods, which allowed the company to add the value of future profits to their accounts.

Enron’s off-the-book accounting practices soon took centre stage, as reporters began questioning whether or not the company was engaged in fraud. In the glare of the spotlight, Enron filed for bankruptcy on 1 December 2001. Chanos and his team cashed out with a $500m profit.

$500million

Profits made by Jim Chanos and his team

  

 

October 2008

Volkswagen

In October 2008, German carmaker Volkswagen [VOW] was on a roll, with several quarters of forecast-beating earnings behind it and a share price climbing past the €300 mark.

But many market experts believed the debt-laden firm was in fact on the road to bankruptcy because it faced a slump in buyer demand as the recession took hold.

This confluence of events gave cheer to short-sellers, who held 12.8% of Volkswagen’s outstanding shares as of 25 October, and were waiting for the inevitable crash. At the time, funds like Albert Bridge Capital shorted two more tranches, one at €233 and another at €206, according to Financial Times.

€1,000

Volkswagen's intraday share price high

  

However, when rival carmaker Porsche announced a few days later that it had increased its stake in Volkswagen from 31.5% to 42.6% with an intention of increasing its holding to 75% within the next year, short-sellers were sent reeling because the true available float went down to just under 6%.

This led to mass-panic selling, sending Volkswagen’s share price rocketing to an intraday high of almost €1,000 making it, for a moment, the most valuable company in the world.

 

December 2012

Herbalife

As chronicled in the Netflix documentary Betting on Zero, Bill Ackman, founder of Pershing Square Capital Management, took a short position to the value of $1bn in supplements firm Herbalife Nutrition in December 2012. He claimed the business was operating a pyramid scheme destined for collapse.

The shares sat at around $45 at the time, and Herbalife described the claims as “bogus”. Even famed trader Carl Icahn gave the company his backing — taking a 26.2% stake and praising the company’s “good product”.

It led to a personal clash between the two traders, with Ackman stating that Icahn was not a “handshake guy” and Icahn informing Ackman that he wouldn’t invest with him even if he were “the last man on Earth”.

Herbalife continued to grow revenues, and even after a $200m fine from the Federal Trade Commission following an investigation into its practices, its shares kept shooting higher.

$200million

Valuation of Herbalife's fine from the Federal Trade Commission

  

In February 2018, Ackman finally quit his position as Herbalife’s shares reached $92.

 

September 2019

Tesla

Last September, Tesla’s [TSLA] share price was languishing at around $220.68. It had dropped following a string of PR gaffes, including personal misdemeanours on the part of founder Elon Musk, and increasing concerns over the company’s profitability, while rumours of filing for bankruptcy abounded. As the negative headlines mounted, 30% of the company's shares were in short positions.

But those betting against Tesla were unsuccessful. Fast forward to 20 July, and Wall Street’s most shorted stock hit a new all-time high of $1,643. The stock had been making a string of new all-time highs throughout supported by leaks of strong second-quarter figures and was further lifted by Musk’s SpaceX successful launch of the Falcon 9. 

Future demand for electric vehicles is also looking bright as nations look for green travel solutions following the lockdown climate reprieve.

Since July, short positions have significantly dropped. As of 6 August, just 8.6% of Tesla’s shares are shorted. Musk, who has previously described short-sellers as “value destroyers”, was no doubt pleased with this reduction.

However, the short brigade has not run out of gas just yet. “We’ve had to cover some shares as Tesla’s price skyrocketed higher but will reinstate them on the stock’s fall back down to oblivion,” Mark Spiegel, managing member of Stanphyl Capital, told the Financial Times in July.

“We’ve had to cover some shares as Tesla’s price skyrocketed higher but will reinstate them on the stock’s fall back down to oblivion” - Mark Spiegel, managing member of Stanphyl Capital

 

 

June 2020

Wirecard

On 18 June this year, German payment firm Wirecard’s [WDI] shares plummeted 61.8% to €39.90, following auditor EY’s announcement of a $2.1bn hole in the fintech firm's accounts.

At the time, around 16% of its shares were held by short traders. Questions had long been bubbling around the company’s valuation and the state of its finances. As the company delayed its full-year 2019 results, more short sellers piled in.

$2.6billion

Profits made by short traders on Wirecard

  

When the shares finally collapsed, short traders made $2.6bn in profits – with one German trader pocketing €750,000 in 30 minutes alone. Short selling dynamo Fahmi Quadir, founder of Safkhet Capital, had also made a bet against the stock. The firm had allocated a quarter of its capital to shorting Wirecard since 2019. Wirecard has subsequently filed for insolvency, and as of 28 July, its share price sits at less than €2.

 

This article was originally published in our Opto Magazine. You can purchase your copy via our Opto Shop.

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