On August 15th Helios & Matheson Analytics Inc. (HMNY), a micro-cap IT services management company, bought a majority stake in online ticketing subscription services provider MoviePass Inc. (private company) for $27 million as per Reuters. The cost of the acquisition was roughly the value of HMNY’s market cap at that time. In mid-September HMNY’s stock price started to rally as reports of increased MoviePass subscription growth emerged, ultimately hitting its historic high of $32.90 on October 11th, a 1,079% gain in less than two months after its acquisition. HMNY’s market cap increased by $289 million on their $27 million purchase.
With such an abrupt and meteoric price move analysts and short sellers, including Citron Research’s Andrew Left, began to downplay the stock and began predicting a price pullback from this rally. Short interest, which averaged only $62,254 from 2010 to 2016, began to increase in late September. Short exposure averaged $1.3 million prior to September 18th and is now $42.5 million as shares shorted more than doubled. Short sellers have increased their positions even as they incurred $38 million in mark-to-market losses as HMNY’s stock price rallied.
With HMNY’s stock price rallying on dramatically increased trading volume, analysts and media pundits were quick to characterize the strong price move as a short squeeze, even CNBC’s Jim Cramer tweeted on HNMY’s price move, “a squeeze is a squeeze by any name”. The definition of a “short squeeze” is when a heavily shorted stock’s price moves higher, forcing short sellers to close out, or liquidate, their short positions in order to stop incurring incremental future losses. This “covering” adds further upward buying pressure to the stock price, creating more losses for shorts that have not covered their positions yet, and forcing even more “buys to cover”. This domino effect of buying pressure also coaxes momentum buyers into the trade which turbocharges upward price movement and trading volume.
On the surface, the 51.2 million shares traded and $20.15 price move (up 303%) from October 9th-11th looked like a classic short squeeze where short sellers took their lumps and scurried away with their tails between their legs. But looks can be deceiving; shares shorted have actually remained stable at 1.3 million shares throughout all of October and short exposure has actually risen from $16.5 million to $42.5 million in October as HMNY’s stock price increased.
With no short covering, HMNY’s upward price move was solely due to long shareholders bidding up HNMY’s stock price. HMNY’s lack of liquidity was the primary reason momentum buying activity affected HMNY’s stock price so forcefully. HMNY’s shares outstanding is only 9.6 million shares, with 6.2 million shares held by insiders there are only 3.4 million shares that can trade in the daily market. The 51.2 million of shares traded over the last three days represent 15 times the total amount of tradable shares. With so much buying pressure on every tradable share a sudden upside rally was inevitable.
Besides the lack of trading liquidity which exacerbates daily price swings when either the bids or offers greatly outnumber the other, the lack of non-insider holders minimizes the amount of lendable shares in the market to support active short selling. The 6.2 million shares owned by the CEO, CIO and other insiders are not in lending pools, leaving just 3.4 million shares that are available to be lent.
Most of the street’s stock loan availability comes from the lending programs of long asset holders (such as Vanguard, Blackrock, State Street, Fidelity and Northern Trust); broker dealers who lend margined securities (such as Schwab, TD Ameritrade, USAA and TradeStation); Prime Brokers who lend leveraged hedge fund assets (Goldman Sachs, Morgan Stanley and JP Morgan). Stock loan availability in micro and small cap stocks is limited due to the fact that they are not owned, and therefore lent, by these large suppliers of stock loan liquidity. These stocks are not usually represented in indexes which long asset holders hold in their funds and ETFs, don’t have a large enough float for hedge funds to safely take sizable long positions in, and are usually in “fully paid for” personal accounts which usually don’t use margin.
This lack of stock lending liquidity in HMNY has caused its stock borrow rates to spike. Stock borrow rates have been greater than 100% fee for all of 2017, but have recently trended up to over 150% fee. With some recalls hitting the street in the last few days and increased borrow demand to try and support prime brokerage locate requests, rates continue to rise, with some new borrows at over the 200% fee level and a few smaller borrows hitting 350% to 500% fee level.
We expect recall activity to increase in the near term as some long shareholders, whose stock is being lent, sell their positions to lock in their unrealized profits before HMNY’s stock price retreats, Stock borrow rates should continue to increase and stabilize around the 150% to 200% fee level this week. If recalls continue and HMNY’s stock price increases or plateaus around the $25-$30 level, creating even more short pressure, stock borrow rates will move even higher.
Much like HMNY’s recent stock rally was not due to a short squeeze, today’s 16% stock price decrease is not due to increased short sale activity – there is very little stock available to borrow today so there is very little new short activity today, virtually all lendable stock is already on loan. Long stock buyers drove HMNY’s stock price up and long stock sellers are now driving HMNY’s stock price down.
Please, don’t blame the shorts.
Want deeper insight into the above analysis? Contact:
Managing Director Predictive Analytics, S3 Partners, LLC
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