- Last Updated: 12:22 PM, May 25, 2012
- Posted: 11:52 PM, May 24, 2012
Even as Wall Street heaps scorn on Facebook, investors eager to bet against the over-hyped stock are having a tough time.
The disastrous opening that affected everyone also burnt short-sellers — investors betting the stock will drop — who hoped to profit.
One hedge-fund manager was ready for a replay of Blackstone’s 2008 initial public offering, which he had successfully shorted.
“I tried to short 15,000 shares on the opening,” he said. “I wanted to short 50,000, but 15 was all I could get.”
After getting a verbal confirmation of 15,000, he covered his short by buying 15,000 shares. At 3 p.m., he learned he had only been able to short 5,000 shares, making him long 10,000. “I ended up losing money,” he groused.
As of yesterday, some 33 million shares of Facebook were out on loan, and thus available for shorting. Short-sellers borrow stock, then sell it hoping to repay the loan with stock purchased at a lower price.
The number of shares on loan represented 8 percent of the free float of the company — double the previous day’s figure, according to an analysis by Data Explorers, which tracks short-selling. The demand to borrow is “strong,” said Data Explorer, noting that 70 percent of the available shares are out on loan.
The cost of borrowing Facebook has also been higher than other Internet stocks, the company added.
Because of their lofty valuations, tech companies typically have more short interest than others, says Data Explorers’ Will Duff Gordon.
Another indication of short-selling interest in Facebook is the volume of put options. These options give an owner the right to sell shares at a specific price.
Some market players have bought put options that would pay if the stock falls below $22, according to Bloomberg.
But it may be a while before the shorts go after Facebook in force. The social media giant’s price has already fallen some 13 percent from the opening price of $38. The shares rose 3.2 percent yesterday to close at $33.03.
Experienced pros say they are leery of getting caught in a short squeeze, where shares are in short supply and prices are heading up.
“The usual Wall Street game is to shake out the weak hands and get them to puke it up,” says David Rocker, former general managing partner of short-selling hedge fund Rocker Partners.
The smart money didn’t have to get a special call from analysts saying that revenue growth was going to be less than expected — an issue that has led to numerous lawsuits against Facebook and its bankers, including three yesterday.
Many savvy investors saw the telltale signs of mania: the media hype, massive insider sales, General Motors’ ad rebuke and a valuation that was off the charts.
Quarterly revenue growth had been dropping like a stone over the past year and that information was widely available. It fell from 111.9 percent in March 2011 to 44.7 percent by this March, according to Ram Partners’ Jeff Matthews.