Offering no shortage of talking points, electric vehicle manufacturer Mullen Automotive (NASDAQ:MULN) jumped dramatically higher on Thursday. On social media, bullish traders of the embattled enterprise discussed the possibility of an upcoming short squeeze. While some of the evidence is compelling, it’s important to consider the wider narrative. Still, the excitement spiked MULN stock nearly 9% up in the early afternoon session.
Specifically, Fintel notes an extraordinary rise in the short borrow fee for Mullen shares. Borrow fees refer to a type of secured loan which bearish traders pay to initiate their shorting activities. Per Financetrain.com, “[t]he typical fee for a stock loan is 0.30% per annum. In case of short supply, when many investors are going short on a stock, the fee may go up to 20-30% per annum.”
Per Fintel, when the Dec. 27 session ended, the borrow fee reached 9.65%, in line with typical shorting-related dynamics. However, at the start of the current session (Dec. 29), the fee hit an extraordinarily high 156.76%. As of the latest print, this metric skyrocketed to a blistering 281.79%. Naturally, those with a contrarian view saw a massive short-squeeze opportunity brewing in MULN stock.
In particular, social media users pointed to past correlations, reporting that prior borrowing fee spikes in other heavily shorted securities led to short-squeeze booms. While it’s quite possible that MULN stock can rise substantially based on its undeniable appeal among dedicated retail investors, it’s also fair to point out that the underlying business has been deeply embattled.
MULN Stock Requires a Wider Context
Fueling speculation toward MULN stock is the possibility of an upcoming reverse stock split. As InvestorPlace Assistant News Writer Eddie Pan stated, a proposed “reverse stock split amendment will likely pass.” On paper, reverse splits may help beleaguered enterprises as such actions consolidate outstanding shares.
Plus, Pan also stated that “[w]ith exchange delisting and index inclusion as major risks, shareholders don’t have much of an option here.” Presently, MULN stock trades hands at 23 cents a pop. Nasdaq requires securities on its exchange to trade at a minimum price of $1. Theoretically, then, this circumstance should boost Mullen.
However, it’s vital for prospective traders to realize that stock splits typically don’t materially impact short sellers. Regarding reverse splits specifically, some evidence points to this dynamic acting “like blood in the water and continu[ing] to draw in more shorts to bet against the company.” Limited data indicates that between one week and three months, reverse splits may spark negative outcomes for split-initiating businesses.
Further, a graduate study research paper published by Utah State University revealed that “[f]or firms contemplating a reverse stock split, they should be aware that short sellers will likely place downward pressure on their stock prices.”
Finally, while short borrowing fees may be spiking, MULN stock as of this writing did not “qualify” for Fintel’s Short Squeeze Leaderboard. At present, the investment resource state that Mullen’s short interest stands at 10.83%, whereas its days to cover is 1.29.
While significant, these stats are not remarkable compared to prior high-profile short-squeeze trades. Therefore, extreme caution remains the ongoing theme for MULN stock.
On the date of publication, Josh Enomoto 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.