What the investor shorting strategy could mean for BlackBerry

Tamsin McMahon on speculation about BlackBerry stock

Leon Neal/AFP/Getty Images

In what has been a volatile and largely irrational stock market, one investment strategy has been almost guaranteed to be a sure thing: shorting BlackBerry.

The Canadian tech company’s stock has been on a wild ride during the past few years. Its share price has plunged to just over $6 in September from $70 in 2011 with much speculation it may not survive into 2013.

Shaking up its leadership and trying out a new name hardly seemed to inspire renewed confidence. Nor did releasing a completely redesigned smartphone, the BlackBerry Z10, at the start of the year.

A whopping 35 per cent of BlackBerry’s 485 million outstanding shares are currently shorted. That compares to less than three per cent of shares in Microsoft, Apple and Google.

Shorting is a risky strategy. Investors essentially borrow stocks from their brokers to sell on the open market. Then they wait to see if the price goes down so they can buy them back for less than they paid and return the stock to their broker. If all goes well, the stock price drops and the investor pockets the difference.

The risk comes from the fact that a company’s stock price can go up indefinitely, meaning investors could suffer virtually unlimited losses. If a stock price rises too much, brokers might start demanding their money back, which forces investors to buy the stock at a loss. The risks are even greater if lots of investors are shorting the stock since that makes them all the more sensitive to the company’s share price.

With more than a third of Blackberry’s stock now shorted, it won’t take much of a price increase to set off a panic among the shorts. That has led to much speculation that BlackBerry stock is ripe for what the investment industry calls a “short squeeze.”

Under a short squeeze scenario, if a company’s stock price starts to rise, investors who are shorting that stock start to buy it in order to limit their losses. If enough start to do this, that can send a stock price rising even faster, causing even more investors to start covering their losses, until a company’s stock price basically starts charting the route Chris Hadfield took to get to the International Space Station.

That’s what happened to Netflix earlier this year after the online streaming company announced it had signed up 2.1 million new subscribers in the last quarter of 2012. The news wasn’t that great — the company announced its income had actually fallen 78 per cent compared to the year before. But with nearly 25 per cent of its stock shorted at the time, it was enough to send the stock shooting up 42 per cent in four days.

Nearly half of Tesla Motors shares were shorted when the company announced the surprising news in May that it had turned a $15 million profit and outsold General Motors’ Volt and Nissan’s Leaf to become the best-selling electric car in America. Granted, they still sold fewer than 5,000 cars.  But the news sent Tesla’s share price skyrocketing to $106 from $35. The Wall Street Journal dubbed it “The Mother of All Short Squeezes.”

A short squeeze is far from inevitable, particularly since many of the shorts are believed to be large hedge funds that are keen to see BlackBerry’s stock price keep falling. Analysts have been pretty divided over how well the company’s first touchscreen-only phone has been selling in the U.S., or how well the QWERTY keyboard version of the phone will do when it’s released south of the border this month.

But BlackBerry may need only modest good news when it releases its first-quarter results June 28 in order to boost its stock price and “shake out the shorts,” as investors like to say.

Whether that translates into a sustained rally is another matter. The company’s long-term future is far from certain, but at least BlackBerry will have succeeded in proving the naysayers wrong. If perhaps only for a little while.

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