The financial sector fared poorly in 2022. However, investors of California-headquartered neo-banking firm SoFi Technologies (NASDAQ:SOFI) really took a beating last year. Does it make sense to short-sell SOFI stock, then? Some institutional-grade investors seem to think so, but that’s a risky bet as certain significant events are coming up soon.
For folks who like to take long positions in stocks, the old but still applicable saying is: “Buy low, sell high.” What about short-sellers, though? Shorting at a low price could be disastrous if the stock turns around and heads north.
Indeed, short-selling can incur unlimited losses when stocks stage a powerful comeback. There’s the potential for this to occur in 2023, so SoFi’s critics should probably just stay out of the trade altogether.
Which Funds Are Betting Against SOFI Stock?
Form 13F filings with the U.S. Securities and Exchange Commission (SEC) indicate that certain institutional investment firms were short-selling SOFI stock as of the most recent reporting period. These firms reportedly include Parallax Volatility Advisers, Capital Markets Trading UK, Jane Street Group, Citadel Advisors, and Simplex Trading.
Now, it might be tempting to conclude that these firms must be on the right side of the trade. After all, they surely have access to research tools and well-informed financial advisors.
Investors should think for themselves, though, and not just follow the trades that others have made. Consider this: As of Dec. 15, 2022, the short percent of float for SOFI stock was 13.88%, and the days to cover were just 2.5. Thus, if the stock unexpectedly rallies, the snap-back effect could catalyze an epic short squeeze.
Those big-money funds might have enough capital to withstand such an event, but do you? Are you prepared to potentially receive a margin call from your broker, demanding that you put more money into your account?
Upcoming Events Could Cause Problems for SoFi Technologies Short-Sellers
With SOFI stock having declined from more than $20 to less than $5, the risk is to the upside, not the downside. At any given moment, the Federal Reserve could announce a more accommodative monetary policy. Or, meme stock traders might suddenly target SoFi Technologies for a massive short squeeze.
Plus, there’s another possible catalyst on the horizon: SoFi’s earnings report and conference call covering the fourth quarter and full year of 2022. These events are scheduled to take place on Jan. 30, 2023.
Think about it: SoFi Technologies might post Street-beating results. Also, CEO Anthony Noto might make a game-changing announcement.
There’s the potential for SOFI stock to rally if there’s a positive surprise. Moreover, Noto purchased $5 million worth of SoFi shares not long ago. You never know — maybe he knows something we don’t, and the short-sellers should consider this.
What You Can Do Now
Noto’s confidence in his company might motivate you to start a small share position in SoFi Technologies. That’s fine, but please don’t go overboard. You don’t have to invest millions of dollars like Noto did.
It’s also perfectly acceptable to stay out of the trade altogether. The worst thing you can do now would be to take a short position in SOFI stock. Consider the potential for a snap-back effect, and keep your eyes peeled as Jan. 30 could be a monumental day for SoFi.
On the date of publication, David Moadel 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.