We live in abnormal times. Companies such as GameStop
All that’s needed for that to happen is a high short interest in the company’s common shares coupled with strong social media support — particularly on Reddit’s WallStreetBets.
This comes to mind in considering the shares of Lordstown Motors whose stock plunged 16% on June 8 after announcing that it lacks the cash to start commercial production, according to the Wall Street Journal.
Should they decide to coordinate their efforts to buy Lordstown — about 31% of its shares are sold short, notes the Journal — Redditors could cause a short squeeze which would drive up its shares. From there Lordstown could sell stock and raise the capital it needs.
I think selling short — borrowing shares from a broker, selling them in the open market, and then repaying the stock loan by buying back the shares at a lower price — is an effective way to profit from a company that is headed for bankruptcy.
However, a short squeeze along the lines of what happened with GameStop and Clover Health strikes me as possible with Lordstown.
Therefore, shorting its shares strikes me as a very risky bet.
(I have no financial interest in the securities mentioned).
Lordstown’s Going Concern Concerns
On June 8, Lordstown disclosed — amending its 10K — that “it doesn’t have sufficient cash to start full commercial production and has doubts about whether it can continue as a going concern through the end of the year,” noted the Journal.
In late May Lordstown CEO Steve Burns told analysts that the company would need to raise more capital to meet its target of building 2,200 pickup trucks by the end of 2021 and that it was burning through cash faster than it had expected.
While preparing its 2020 financial statements, Lordstown — which aims to build Endurance, a $52,500 truck for commercial-fleet operators — concluded that it would end the year with between $50 million and $75 million in cash and that there “were substantial doubts as to the company’s ability to continue as a going concern in 2021,” noted the Journal.
Lordstown is also the subject of a Hindenburg report that alleged that Lordstown “had misrepresented the strength of its truck preorders and its progress toward launching the Endurance later this year.”
Burns told the Journal that the report “contained half-truths and lies” while Hindenburg founder Nathan Anderson told the Journal after Lordstown’s June 8 filing that “it showed the company was starting to acknowledge its precarious financial state and its unrealistic production projections.”
How Redditors Defy Economic Logic
If investors can cause a short squeeze, the companies endangered by high debt and shrinking revenues can enjoy a surge in stock price. If they sell enough stock, they can considerably reduce their odds of bankruptcy.
AMC — the movie theater chain — is a prominent example of a company that Redditors have helped save. As I wrote last month, AMC’s first quarter revenues fell 84%. So far in 2021, those investors have helped drive up its stock 25-fold. AMC has sold shares worth $1.2 billion since the end of March, according to Deadline.
A more recent example is Clover Health – “a seller of health-care insurance that went public via a SPAC deal in October – has risen for the past six days, capped by a nearly 86% surge on June 8 and another 24% pop in pre-market trading on June 10.” Clover has not raised new capital since its stock popped this week.
Clover — 43.5% of its shares are sold short — was among the most shorted across U.S. exchanges, after being the target of a report by short seller Hindenburg in February 2021, which took a position in the company, according to Reuters.
The report suggested that Clover was facing a probe from the Department of Justice over possible corruption charges. In February, CNBC reported that Clover acknowledged that probe and an SEC notice of investigation.
Lordstown has some things in common with Clover — most notably the bearish Hindenberg report and the high short interest.
What Analysts Are Saying About Lordstown
Analysts have not lost hope for Lordstown.
According to SeekingAlpha, Bank of America analyst John Murphy wrote that the value of its GM Lordstown plant and investor interest in the EV market make him “hesitant to draw a conclusion that RIDE will not be able to line up additional funding.”
RBC Capital Markets was more pessimistic — setting a $5 price target (about 58% below its June 8 close) and an underperform rating.
On June 9, a Redditor posted about Lordstown, “Bad news is good news. Bad news means more shorting which means higher short interest which means Wall Street Bets loves it, which means that it’s going to the moon. If you disagree, you’re an elitist shill for the hedge funds.”
