Believe it or not, short sellers are not short-term traders. Short sellers don't short a stock based on market sentiment, on emotion, on momentum, on technical analysis or based on astrology.
Short sellers are strategic investors and they do things by the book. That is, they analyze the fundamentals of a stock very closely before they short. These guys don't day trade, don't swing trade and most of the time they are so much in the money (because they shorted from very high up), that they don't get frightened by big moves in stocks they short, even if the move is 100% to the upside.
Having said this, however, not all short sellers fall into this category. There are many small fish out there and most don't play by the rules. One of the rules is that you never ever short a bio-tech stock that is close to an FDA announcement. I have seen heavy shorted stocks go from $5 to $20 in a single day. Also, never short a potential turn around situation play. Especially when the whole street is talking about it and there is evidence that the stock might actually turn around.
So as your Seeking Alpha resident Research In Motion (RIMM) bull, I was quite surprised to read that short sellers in RIMM have doubled up over the past several months.
(click to enlarge)Data from NASDAQ
In the chart above, while short sales have almost doubled over the past 6 months, it is interesting to note that the average volume has almost tripled, so as far as days to cover in concerned, the average is about two days that is not of a concern.
About 1/3 of the total shorts are probably from much higher levels and have no intent of covering anyway (the strategic shorts investors I mentioned in the beginning).
However, all those who have shorted the last several months are all bleeding. That's right, 100% of the short sellers in recent months are all out of the money.
So on the one hand I have the highest respect for short sellers, but this time around (up to now at least), they have been wrong. Also, many of then have violated one of the rules of short trading. That is, never short a stock that has the possibility of being a turn around situation play.
But above all, even if RIMM does not perform like I think it will (read all my RIMM logic here), even if they don't make a profit by next year and even if BB10 turns out not to be the success I think it will, there is one other reason why short sellers will still be burned.
RIMM is a top candidate to be bought out by another bigger fish. There is no shortage of companies out there with the cash on hand to buy them in order to get into the smartphone space.
In fact, before Apple (AAPL) developed the iPhone, they were discouraged from going into the business, because everyone thought they might not make money.
So who are the possible contenders? Well it might be anyone. IBM (IBM) might buy them, for RIMM's enterprise orientation fits very nicely with IBM's corporate culture. Samsung is defiantly a company that would be interested. If I were them, I would defiantly want to diversify and have my own platform. Why would I want to rely on Google (GOOG) forever?
And why not even throw in QUALCOMM (QCOM) as a contender? Is there any law that says a chip maker can't diversify in the smart phone space? And while your at it, throw in Intel (INTC) also. Is there any reason Intel would not want to have their own platform in the space? I can't think of any reason and if I were Intel, I would have bought them already.
So either way I think short sellers will get burned. One the one hand the company (I think) will do great and on the other, there is always the possibility that someone will want to buy them out.
And as I'm finishing writing this piece, RIMM just announced third Quarter earnings and the results blasted away analyst estimates.
The company actually earned $9 million in its fiscal third quarter (ending Dec. 1) compared to a $235 million loss a year earlier. The profits are a result of a tax benefit, but excluding the one time benefit, RIMM lost 22 cents per share, a whole lot less than the consensus of 35 cents. After hours the stock was initially up 8% before correcting by about 10% to the downside. I think it has more to do with buy the rumor and sell the news than anything else. Remember, the stock has doubled the past couple of months.
I will have complete analysis on RIMM's results over the weekend, but for the time being, shorts better take advantage of today's correction and cover, because when BB10 comes out, there will be no second chance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.