Chinese online educational company GSX Techedu Inc ADR (GSX) had the largest increase of shares shorted over the past week with $923 million of new short activity over the last 5 trading days. GSX hit a year-to-date high of $131.27 on August 6th and has lost 33% of its value since then. GSX’s price decline may have been jump started by Citron Research and Muddy Watters Research “stock fraud” tweets. Earlier this year Grizzly Research joined Citron and Muddy Waters in calling the company a “fraud”.
2020 has been a wild ride for GSX short sellers. After a relatively flat 1st quarter, short sellers increased their exposure from short 12.20 million shares to short 42.16 million shares in just two and a half months, from March 30th to June 13th.
Short sellers then had a complete change of heart and covered more than half their shares by August 10th with shares shorted bottoming out at 20.36 million shares.
In just over a week, short sellers have once again executed an about face and shorted just over 13 million shares.
GSX short interest is $3.00 billion; 33.38 million shares shorted; 25.94% of its float and a 1.97% stock borrow fee. GSX is the 22nd largest short in the U.S. market and the 3rd largest Chinese ADR short behind Alibaba (BABA) at $9.75 billion and Pinduoduo (PDD) at $3.41 billion. GSX is the largest short and makes up half the total short interest in the Educational Services Sector.
Unfortunately, all this whipsawing short selling and short covering activity does not mean that short sellers market timed their trades well. Shorts are down -$2.13 billion in year-to-date net-of-financing mark-to-market losses, including up +$83 million on today’s -2.17% stock price move.
If GSX’s stock price continues its downward trend we should expect continued short selling with levels inching back towards its recent high at the 43 million share level. This means that there may be another 10 million shares of short selling hitting the tape in the near term. I would not expect a slowdown in short selling or sizeable buy-to-covers until GSX’s stock price stops its freefall and plateaus as short sellers look top recoup their year-to-date mark-to-market losses. Short sellers may be looking to ride GSX’s stock price back down into the $40’s and even lower if there is any traction to the “fraud” accusations.
Stock borrow rates will rise in tandem with the additional short selling. Expect rates to hit the 7% to 10% fee range if total shares shorted tops 40 million shares. The higher stock borrow rates might chase out some existing short sellers and dissuade new ones from entering the name, but if shares shorted keeps its levels in a high rate environment it would mean that shorts are expecting large Alpha returns in excess of these high financing costs.
Looking at short selling trends over time provides insight into overall market sentiment as well as the strength of bearish conviction in individual equities. Our Blacklight SaaS platform and Black APP provides an up to date view of short selling and short covering on an equity, sector, index, or country-wide basis allowing investors\traders to better manage their existing long and short positions.
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