Yesterday securities regulators subpoenaed documents from Ubiquiti networks (UBNT) regarding its accounting policies and other financial, trade and counterparty relationship practices. UBNT’s stock price opened down 25% and closed at $55.28/share. Prior to yesterday’s price drop UBNT was the 8th largest short in the Communications Equipment sector with $499 million of short exposure but with yesterday’s price move short exposure decreased to $381 million with short sellers making $126.3 million in one day mark-to-market profits.
Short interest in UBNT was relatively stable for the first three quarters of 2017, averaging $428 million of short exposure with shorts down only $23.6 million in year-to-date mark-to-market losses. On September 18th, Andrew Left of Citron research issued a report calling UBNT a “fraud” and short interest spiked, increasing from $414 million on September 15th to $707 million on October 26th. Short interest remained in the mid $600 million level till year end. Unfortunately, the anticipated price drop never occurred, the stock gained 22% for the year after the Citron research report came out, costing shorts $198.1 million in mark-to-market losses. For the year, shorts were down $221.6 million of mark-to-market losses in 2017.
In 2018, short sellers began to cut their positions as UBNT’s stock price marched steadily to $80/share. By the time yesterday’s announcement came out, short exposure had dipped below $500 million. Shares shorted fell from a high of 11.6 million on September 20th 2017 to 6.7 million on February 16th 2018. Shorts had been steadily buying to cover as UBNT’s stock price increased, selling shares to keep their dollars at risk below $600 million and ultimately below $500 million. Short conviction was waning, but there were still steadfast short sellers willing to incur some losses in hope of an Enron-like windfall if the “bad news” ever materialized. Shorts were down another $41.8 million in year-to-date mark-to-market losses as of February 16th.
Yesterday’s 25% price drop rewarded the remaining unyielding short sellers with a $126.1 million mark-to-market profit. We’ve seen some additional short selling as existing shorts bulk up their positions and new short sellers enter (or re-enter) the trade.
Stock borrow rates continue to be expensive in the name, short sellers paid out $49.6 million in borrow costs in 2017 and $15.6 million in 2018. After hitting a high of 23% fee in October 2017 rates had eased to slightly below 16% fee, but after yesterday’s price move precipitated additional short selling pressure, stock borrow rates surged back over 17% fee with expectations of even higher rates if more shorts get into the trade.
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Managing Director Predictive Analytics, S3 Partners, LLC
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