Shares of Troika Media (NASDAQ:TRKA) slid 39% on Tuesday after the firm reported lower-than-expected profits. The group announced it earned $5 million in the past six months, a run rate that would have missed its lofty $27 million adjusted EBITDA target by a wide margin.
The rapid decline now places TRKA stock on the SEC’s Short Sale Restriction (SSR) List, also known as the “alternative uptick rule.” The rule is designed to decrease the risk of short-selling “bear raids,” placing limits on any stock that has dropped by more than 10% in one day.
Investors can now only sell TRKA stock short on a price uptick (a price rise) for that day and the following.
About the SEC Short Sale Restriction List
In 1938, the U.S. Securities and Exchange Commission (SEC) introduced an uptick rule after a period of concentrated short selling in 1937. The new regulations were designed to short-circuit the type of speculative selling that causes panic.
A brief repeal of the uptick rule between 2007 and 2009 highlighted its effectiveness. Stock markets saw far greater volatility as restrictions lifted. Some researchers have even suggested that the repeal could have caused the 2008 financial crisis after speculators carried out a “bear raid” of Citigroup’s (NYSE:C) shares.
TRKA Stock: What to Expect Next
Nevertheless, the SEC’s Short Sale Restriction List has not prevented shares of Troika from seesawing in recent weeks. Shares have traded from as low as 11 cents in January to as high as 93 cents on Monday. As of this writing, TRKA stock trades at around 45 cents.
The customer acquisition firm has found itself sandwiched between heavy short selling on the one hand and bullish reports on the other. (Note: I wrote one such bullish report on Feb. 27). Short sellers largely believe that the company will have to dilute existing shareholders to raise cash, while buyers are betting that a recent financing engagement with Jefferies will avoid such fundraising.
This has caused short fee rates for TRKA stock to spike as both buyers and short sellers pile in. According to data from Fintel.io, short sellers must now pay a 107% fee rate to borrow shares, putting TRKA in the same league as Beyond Meat (NASDAQ:BYND) and Bed Bath & Beyond (NASDAQ:BBBY) by that metric.
It’s impossible to gauge where Troika’s stock will head next. Highly shorted stocks can become extremely volatile, and no amount of fundamental analysis can predict whether short sellers or buyers will prevail.
Still, longer-term investors will know that a company’s fundamental performance will eventually reveal itself in share prices. Troika Media could be worth as much as $4.70 if it executes on its prior promises. But if management continues to fail at hitting these lofty targets, even Tuesday’s share price declines might not be enough.
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On the date of publication, Tom Yeung did not hold (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.