CEO Elon Musk recently claimed that Microsoft Corp. Co-Founder Bill Gates has a multibillion-dollar short position against his company. Musk suggested he doesn’t trust Gates and his stated commitment to addressing climate change, given his bets against Tesla.
“Too often, sophisticated hedge funds have used short-selling and complex derivatives to take advantage of small investors,” Musk wrote in an email to CNBC. “They will short a company, conduct a negative publicity campaign to drive the stock price down temporarily and cash out, then do it all over again many times. The term for this, as you may be aware, is ‘short & distort.’”
The mention of a short position brought the spotlight to an age-old dynamic of the stock market: Betting on a short squeeze always presents a measure of risk.
Sometimes, investors buy stocks with heavy short interest to exploit the potential for a short squeeze, but the attempt to swing for the fences sometimes ends in disaster.
A short squeeze is an unusual condition that triggers rapidly rising prices in a security due to short sellers being forced to cover their positions by buying shares. For a short squeeze to occur, the security must have an unusual degree of short-sellers holding positions in it.
Generally, a rapid rise in the stock price could be attractive, but it is not without risks. Here’s how it works: Active traders monitor highly shorted stocks and watch for them to start rising. If the price picks up momentum, the trader jumps in to buy, trying to catch what could be a short squeeze and a significant move higher.
Short squeezes are arguably always a gamble. Over the years, some stocks have moved higher after they had a heavy short interest, while in other instances, they tumbled miserably.
The short squeeze of American video game retailer GameStop Corp. in January 2021 took the market by storm, causing major financial consequences for some hedge funds and large losses for short-sellers. Roughly 140% of the game retailer’s public float had been sold short. There was a mad rush to buy shares to cover those positions, which caused the price to rise further.
Although a number of hedge funds participated, the short squeeze was largely triggered by users of the subreddit r/wallstreetbets.
At the height of that episode, on January 28, 2021, the short squeeze caused the retailer’s stock price to reach a premarket value of over $500 per share. The price was nearly 30 times the $17.25 valuation at the beginning of that month. One ticker that some traders have looked at to also have short squeeze potential is Regencell Bioscience Ltd.
The short volume ratio has a similar pattern to that of GameStop with both averaging over 40% in the past year. In fact, Regencell has sometimes been more heavily shorted than GameStop, with occasional days close to 90% shorted.
Although Regencell and GameStop stocks’ short volume profiles might be considered to be similar, not as much is known about Regencell. As of May 16, the company’s founder and CEO held 10,539,159 ordinary shares, representing 81% of the total number of issued and outstanding ordinary shares in Regencell.
Regencell’s total cumulative short volume, as reported by a third-party data analytics provider, is over 19 million shares, while the total outstanding shares less CEO and Chairman’s shares is only approximately 2.4 million, yet Regencell is still trading over 289% its IPO price. Its total reported short volume to outstanding shares ratio (excluding CEO and Chairman’s shares ratio) is almost double of GameStop, being approximately 8 times whereas GameStop is slightly over 4 times. GameStop is currently trading 50x over its historical low of $2.52. Where are all the extra shares coming from?
As witnessed on Reddit and other social media and forums, especially during the GameStop short squeeze, retail shareholders came together, driven by the community’s effort to punish market participants who make a living shorting and distorting public companies, causing them to stumble and fall.
Regencell Founder and CEO Yat-Gai Au’s believes in a better and brighter future for the company. He says he has demonstrated his commitment and confidence and his position against possible short and distort sellers by using his own money, amounting to over $5 million, to purchase Regencell shares. Moreover, he has support from Samuel Chen, a very successful early Zoom Video Communications, Inc. investor. Samuel owned 8.8% of Zoom shares and was the second largest individual investor.
To date, Mr. Au has converted his shareholders’ loan of $3.25 million to Regencell’s ordinary shares upon listing. He has also pledged not to draw a salary and bonus of more than $1 until Regencell reaches a $1 billion market capitalization and reserved share options for all employees except himself.
Additionally, to demonstrate commitment to Regencell, all directors and employees who were previously granted stock options upon Regencell’s IPO have agreed to a further lock-up undertaking for a period of six months after their stock options become vested. As their stock options are set to vest on July 16, 2022, their shares will remain locked up until January 16, 2023. Whether or not the ticker will encounter a short squeeze is anyone’s guess, but some traders are keeping their eyes on a host of companies that seem to have outsized short interests.
Source from: Benzinga