Shopify Inc (US) (NASDAQ:SHOP) has come under intense scrutiny of late after Citron Research issued a scathing bearish report. I am both skeptical of and thankful for big name short sellers. I’m skeptical because once these short sellers announce their large positions to the financial media, the stock in question almost always plunges sharply.
Would the stock have plunged on its own without this news? Or is the announcement of the large short position a self-fulfilling prophecy?
More to the point, will SHOP stock continue to plunge after Citron Research’s recent call for a $60 price target?
In other words, would these shorts make any money at all if they hadn’t announced their position to the media? I have to think that the best shorts sellers and traders alike hold their positions close to the vest. (Even I don’t give out my best stuff for free, after all.)
Skepticism aside, as an options trader, I am also thankful to short-selling research firms like Citron. They provide excellent opportunities for profitable rebound trades once the hype of the news has worn off. I believe the same opportunity exists for Shopify.
Remember Citron’s short call on Netflix back in September 2015? If you’d gotten in when they issued their short call, you’d be up more than 70% right now. Even better, if you’d bought into bitcoin back on Sept. 1 this year when Ctiron said to short it, you’d be up 21% in roughly a month’s time.
Admittedly, I’m unfairly picking on Citron. Netflix did hit the research company’s $80 target early in 2016, and bitcoin did plunge the week following Citron’s recommendation. But both are up significantly since.
As you might expect, the recent SHOP stock news had a similar effect. SHOP stock went from trading in overbought territory to oversold territory in just a matter of weeks. And all of this with Shopify earnings just over the horizon, creating a short-term opportunity for SHOP options traders.
Wall Street is expecting Shopify to post a loss of a penny per share in the third quarter, on revenue of $165.63 million. Playing to SHOP stock’s favor, it beat expectations significantly in the prior two quarters and another beat here would go a long way toward unwinding short-term negativity.