As seen since the start of October, oil & gas play Camber Energy (NYSEAMERICAN:CEI) stock has seen a serious reversal in its recent good fortune. CEI stock is off more than 55% in past seven days.
Why? As my InvestorPlace colleague Chris MacDonald reported, due to a scathing short report from Kerrisdale Capital. A hedge fund that has taken a big short position in Camber Energy, Kerrisdale laid out its bear case for the stock.
Mr. Market seemingly agreed with its thesis (detailed below). Following the development, shares in the penny stock, which had weeks before caught the eye of Reddit traders, sank like a stone. However, it’s clear this battle between retail longs, and the so-called “smart money” shorts, is far from over. The Reddit set has dived back into it with full force.
So, who’s right, and who’s wrong? Reading the details, the short side appears to be barking up the right tree. But joining them by betting against this volatile small-cap stock isn’t your best move. As Reddit’s r/WallStreetBets community remains a powerful force in the market? They may have what it takes to squeeze this stock with many fleas.
Strong Bear Case on CEI Stock
Putting it simply, Camber Energy has all the makings of a great short-seller target. In other words, it’s an overvalued company, with enough negatives at play to send it lower, enabling those betting against it at higher prices to make big profits, after they cover at much lower prices.
It’s not merely a case of CEI stock having a few red flags, which is par for the course when dealing with small cap names like this one. As Kerrisdale alleges its 25-page report, it’s almost as if this is a whole company made up of the markers. Think of any sort of concern/risk associated with small-cap penny stocks, and Camber’s got ’em.
These include out-of-control shareholder dilution, low-quality assets of questionable value, and the touting of a move into clean-energy, which based on the details has been hyped out of whack with its actual substance. Of course, red flags by themselves sometimes aren’t enough to sink a stock down to its true value. The market can remain irrational longer than you can remain solvent, and all that jazz.
However, based on other issues Kerrisdale has pointed out (for example Camber’s risks of delisting and default), there are some possible negative catalysts that could take the wind out of it, and on its way to a stock price that’s literally pennies. And, yet, despite my agreement with the bear case laid out by this hedge fund, I don’t think joining them on the crowded short-side is the way to go.
Another Spike Is in Motion… and Could Continue
In the days after the short report dropped, CEI stock made its way from over $3 per share, to prices as low as 86 cents a piece. For bears who got in quickly, or saw the same things Kerrisdale was seeing before it made its bear case, this may have been fast trading profits, from a well-timed short position.
Now that the long side appears to be fighting back? Going short Camber Energy now appears to be a risk not worth taking. Since briefly falling to sub-$1 per share prices, it bounced back with a vengeance. Oct. 7 saw a near 96% jump. Pre-market on Oct. 8 took it back up to $2.41 per share before reversing. Yesterday saw the shares close down again, at $1.63 a share.
With talk of it trending again on r/WallStreetBets, this counterattack from the retail-heavy long-side could carry on. It may be enough to send it back above $3 per share. It could even be enough to send it back to its 52-week high ($4.85 per share). Or perhaps, even higher. Given to the degree in which its short-interest is going up (based on short volume data provided by Fintel.io), the short-siders that’s convinced this stock is an ultimate zero could find themselves scrambling to cover in the immediate term.
Not a Short but Not a Buy, Either
So, if it’s too risky to short, is it time to dive into it? Not so fast. Sure, buy today, and it may still be early enough to ride the meme momentum, and make some fast trading. The caveat? There’s a risk you’re getting in too late, leaving you exposed to heavy losses.
Like with similar situations this year, where investor psychology, not fundamentals, drives price action, taking a position (on either side) is more-or-less a straight up gamble. Tough to handicap, any sort of profits (or losses) can be chalked up to luck.
Going short is a situation where the potential profits aren’t enough to counter the danger of a short squeeze. Going long is a wager on renewed market madness. A tough situation to assess, it’s best to invest elsewhere. Skip on CEI stock.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.