Do you know about naked shorting?
When a popular stock tumbles, a common course of action is for retail investors to sound the alarm that naked short selling is occurring. This term refers to the practice of shorting a stock “without having properly located and borrowed the shares to be sold.” Thanks to a variety of loopholes, naked short selling isn’t always illegal. But that doesn’t stop retail investors using it as a scapegoat for a stock’s problems.
This practice is problematic for multiple reasons. It’s hard to prove that naked shorting is taking place, and many such claims are based on hearsay. Even if and when it is occurring, investors are quick to attribute a company’s problems to murky allegations rather than actual management problems or important macroeconomic trends.
This can serve to cover up important factors that are actually pushing the stock down. And when it comes to a few highly unstable meme stocks, it is important to see what’s going on. The way it looks from here, naked shorting isn’t what investors should be focused on.
AMC Entertainment (AMC)
The iconic theater chain hasn’t fallen from its place as one of the most popular meme stocks. Unfortunately, that hasn’t helped keep AMC Entertainment (NYSE:AMC) from falling 73% in the year to date.
Earlier this year, some credible speculation of naked short selling rose. The stock made it to the New York Stock Exchange’s threshold list. InvestorPlace contributor Joel Baglole speculated that it could be primed for the “mother of all short squeezes.” But since that news broke on March 8, AMC stock has fallen more than 81%, making it clear that the short squeeze isn’t coming.
AMC investors still love to cry naked shorting whenever the stock falls. But this is a key example of why they should focus more on the company’s many fundamental problems.
For instance, Citigroup recently issued a bearish price target. Its analysts believe that AMC is destined to fall back into penny stock territory soon following its ill-rated reverse stock split and APE share conversion. InvestorPlace analyst Louis Navellier rates it as a D due to its poor performance and miserable outlook. And Michael Gayed predicts worse times ahead, noting, “you can’t meme your way out of mismanagement.”
That statement sums up the problems facing AMC stock and it should remind investors to steer clear. Naked shorting should be the least of its investors’ concerns.
Meta Materials (MMAT)
This little-known functional materials company has risen to many peoples’ radar because of the conspiracy theories linked to it. Meta Materials (NASDAQ:MMAT) spun off its preferred shares, which traded under the symbol MMTLP, into a privately held company called Next Bridge Hydrocarbons in December 2022.
When the Financial Industry Regulatory Authority (FINRA) made the decision to halt trading in MMTLP, shareholders quickly cried foul play. Months later, a motivated group of investors is still working overtime to lob allegations of naked shorting at Wall Street. Meta Materials itself has hired a law firm to investigate the presence of the illegal practice. As Forbes reports:
“Like most perfect narratives, this one isn’t true. It’s doubtful that “naked short-selling” even exists anymore. In 2008, the SEC amended a rule called Regulation SHO, and made naked short-selling all but impossible, according to Pradeep Yadav, a professor at the University of Oklahoma who studies financial markets and says there’s actually no way “to associate a particular short-sale with a particular failure to deliver.”
As InvestorPlace has argued, this sad story should serve as a cautionary tale for aspiring meme stock investors.
MMAT shareholders should be more concerned with the fact that the stock is trading at only 22 cents per share. Like AMC, it is down more than 45% for the past six months. And it still needs to regain Nasdaq compliance in order to avoid being delisted. That’s just the tip of the iceberg for this company with a highly checkered past. Naked shorting allegations are the least of its problems.
Mullen Automotive (MULN)
A fellow penny stock, Mullen Automotive (NASDAQ:MULN) is a classic example of a company that even the highest retail investor interest can’t resurrect.
Mullen’s investors are also prone to levying naked shorting allegations as a means of justifying the stock’s poor performance. The company’s management has helped fuel this fire by hiring a law firm to investigate these allegations. So far, this tactic doesn’t seem to have helped.
In Mullen’s case, the legal investigation may be distracting investors from the actual problems it is facing. As InvestorPlace contributor Faisal Humayun reports:
“Mullen Automotive has weak fundamentals with a first-time revenue of $308,000. Importantly, cost of sales was 81% of the revenue. [T]he cost of R&D is significant and has been increasing over the quarters. Unfortunately, the company hasn’t been able to translate its innovation into growth.”
That alone should be reason to avoid MULN stock. But investors should also consider that like MMAT, it is facing the threat of being delisted.
Until naked shorting claims prove credible enough to translate into actual legal action, they are useless to investors. And so far, that hasn’t happened for AMC, MMAT or MULN.
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Read More: Penny Stocks — How to Profit Without Getting Scammed
On the date of publication, Samuel O’Brient 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.
