SHORT SQUEEZE COMING!!!
You hear it all the time on social media, especially with money losing companies that rely on dilution to fund operations. There are always bulls talking about a pending squeeze, how bears are gonna cry. With it comes exhortations to buy even more shares, to "stick to those short sellers".
And I have no doubt it works, it did on me when I first started playing the market.
Ultimately the only fundamental that really matters with public companies is the levels of supply and demand for shares. If more people are buying than selling, then the PPS will climb. If there are more shares being sold than there are buyers, then the PPS drops. Economics 101, you don't need a university degree to know the basics of supply and demand.
So is a short squeeze possible with Vuzix?
First it helps to understand the mechanics of short selling which I will explain. I know a lot of retail shareholders only understand shorting as a "bet" that a stock is going to go down in price, without really knowing what's involved.
According to Nasdaq the level of short interest in VUZI was 5,108,228 shares up to March 15th 2018. The next update is due to be published on April 10th which will give the short number current up to March 31st 2018.
What this means that on top of the 27,301,201 shares that were issued and outstanding (as per the 10K) up to March 16th 2018, there are another 5+ million that were shorted. I call it a form of artificial dilution. Vuzix has issued 27.3 million shares, and shorts have added another 5+ million to that.
How?
Let's say you bought 10,000 shares of Vuzix in January at $10 because you thought it was going to $15 or 20. At the same time a "bear" who thought the PPS was going to fall wanted to take out a short position. That "bear" can borrow the shares from a shareholders account, at a cost of course. The shareholder doesn't even know the shares have been loaned out, when you check your brokerage account you'll still see a holding of 10K shares of Vuzix. You don't actually have physical possession of a share certificate, your shares are held "in street name".
So you still own those 10,000 shares, and someone else owns them as well, hence why I call it artificial dilution.
The short seller has borrowed your 10,000 shares and sells them into the market in Janaury and gets a price of $10 per. That nets Mr Bear $100,000 but he owes you 10,000 shares. The short is betting on the prospect that he'll be able to buy them back for less than the $100,000 he got for selling them. The best case scenario for a short seller is that the stock he's short on goes to $0.00 and gets delisted, then in this example he gets to keep the entire $100,000 less fees.
So where does a squeeze come into play?
We know that VUZI is now trading for a little over $5 right now, but back in January when it was around $10 nobody could say with 100% certainity which way the PPS would go. If an analyst with CNBC had come out with a strong buy reccomendation at $10 its conceivable the PPS could have shot up to $15, $20....who knows, supply and demand.
The short seller who got $100,000 by selling the shares he borrowed doesn't get to take that money and buy a new Jaguar, it has to stay in a margin account to protect his short position, along with additional money to secure the position, typically 50%. That means that the short seller needs another $50,000 on top of the $100,000 garnered from the short sale.
If the PPS started climbing the short seller would be required to further fund his margin account. If VUZI had gone to $20, then the short seller would need $300,000 in his margin account. $20 multiplied by the 10,000 shares for $200,000 plus another 50% or $100,000 to cover the cost of covering at $20+.
And here is where the squeeze can come into effect. If the short seller is unwilling or unable to meet the margin requirments then he can be forced to cover. The broker he borrowed the shares from will simply take the money from the margin account and buy the shares back, that's the reason for the 50% extra.
Do note that I wrote, "can come into effect", I put it that way because while its possible I wouldn't count on it. And in point of fact if your entire long thesis is built on the possibility of a short squeeze, then you might want to re-consider.
Going short is incredibly risky, and the players who work the short side....they have a lot more risk than longs. Someone who's short 10,000 shares of Vuzix, having taken out a position at $10, the most he can make is $100,000 less fees. But on the flip side there is theoretically no limit to how much he can lose, it all depends on how much money he has. While a stock cannot fall below $0.00 per share, there's no limit (theoretically) to how high it can go.
If you decide to bet against the bears know that you're going up against players with huge bankrolls, I'm talking hedge fund types who often have more than $1 billion under management. I would submit that this is the reason that there wasn't a short squeeze back in January when VUZI was topping out at $11.40 per share despite 3+ million shares being shorted already at that time.
The players behind those short sales were not forced to cover and drive the PPS higher with their buying because I assume they have a big enough bank roll to ride out any pump the PPS sees.
If shorts weren't forced to cover at $11.40 what would make anyone think they'd be squeezed at just over $5?
And remember Vuzix isn't making any money, they just reported a net loss of $19.7 million for the year 2017, up from a loss of $19.3 million in 2016 and $13.4 million in 2015. The accumulated deficit was over $96 million at the end of 2017, and is probably close to if not over $100 million by now.
Yes they had revenue of $5.5 million in 2017, but that's revenue not profit. This isn't virtual or artificial reality, in the business world a company eventually needs revenues to exceed expenses. Last year in March of 2016 they put out a PR that talked about moving toward profitability, they went in the other direction.
Good luck in any case, I doubt this miserable and pathetic blog will convince any longs to reconsider, nothing beats real world experience, even if the lesson is an expensive one. I myself am not short any shares, instead I own put options, they're a less risky way of betting on a stock's price falling.
