Twitter: Don't Be Fooled By Low Share Price

May 23, 2016 3:13 AM ETTWTR
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Long/Short Equity, Short-Term Horizon, Arbitrage

Contributor Since 2014

Twitter's "Appeal" At First Glance

  • Trading Around All Time Low
  • Jack Dorsey Appointed as CEO
  • Added BET's CEO to Board
  • Amended 140-Character Limit to Not Include Photos and Links
  • Rumors of buyouts

The Sad Truth

Although investors may see these changes to corporate structure and the "low" price as a bargain (as compared to historical prices), financial data analysis reveals a company with diminishing investor confidence. After analyzing the financial statements, the numbers don't add up to a company worth owning. With a book value per share hovering around $6.50, Twitter (TWTR) is still trading around 2.2 times their book value. Even while trading around 50 cents above its all-time low, short interest (the percent of outstanding shares being shorted) has more than doubled since the end of February. This absurdly high percent of investors betting on a decline in share price gives us a look into where the general public and institutional investors think the stock is going-- down.

A Look Into Short Interest and Overall Economic Conditions

Short interest is the amount of shares being shorted divided by the total number of shares outstanding (also known as the "short float"). As a rule of thumb, short interest above five percent is considered very high. With a short float of 17.5%, investors are clearly expecting a decline in the short term. Even more alarming is the fact that short interest has doubled since February, when Twitter was trading much higher than the current share price of $14.43. The fact that the amount of investors shorting Twitter has increased, although the stock has decreased in value tremendously, is quite alarming.

Along with the weaknesses surrounding Twitter's fundamentals, a bigger problem lies in the overall economic downturn developing. Last week, the 50 week moving average of the S&P 500 moved below the 100 week moving average. This formation, known as a "death cross" is seen as a sign of catastrophic economic conditions to come. This death cross formation has occurred twice in the past sixteen years. The last time we saw this formation was shortly before the stock market crash of 2008. The only time other than 2008 was shortly before the infamous burst of the tech bubble in 2001. If this indicator holds true as it did in those times, highly speculative growth stocks, such as Twitter and Tesla (TSLA), would be the first to "hit the fan". If these conditions agree with their thinking, we urge investors to remain vigilant and take short or hedging positions in these stocks. While long-term conditions may turn out to be profitable, the next year could prove to be catastrophic for bullish investors if careful research is not done. In our view, long puts on Twitter and speculation-driven stocks can prove to be highly profitable if they are approached with correct timing and careful research.

Disclosure: I am/we are short TWTR.

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