Lithium metal battery producer QuantumScape Corp (QS) is up over +26% in mid-morning trading after it announced positive technical results for its solid-state batteries. The need of a fast-charging, safe and powerful battery is one of the most important components for the Electric Vehicle industry. QS short interest is $110 million; 1.90 million shares, 9.55% short interest % of float; 8.72% S3 short interest % float (which includes “synthetic longs” created by short sales); 109.08% stock borrow fee which is trending over the 175% fee level in recent trading.
QS is the 12th largest short in the Auto Parts & Equipment sector with short selling relatively flat over the last month primarily due to a lack to stock loan supply. Over the last month shares shorted increased by 162 thousand shares, worth $9.4 million, a +9% increase as its stock price rose +347%. Over the last week, we saw shares shorted stay relatively flat, only down fifteen hundred shares, as QS’s stock price rose +63%.
QS short selling was very active in October and November as stock borrows were still available and QS’s stock price was trending slightly downward. Shorts increased their shares shorted by +384%, with shares shorted increasing from 405 thousand to 1.55 million shares. Over this time period stock borrow rates ranged between 7% and 10%. Short financing expense grew from $1,630/day to $10,388/day, a large increase in two months, but still palatable to short sellers looking for QS stock price to continue the downtrend trend they saw from September to late October.
In December, QS’s stock borrow fees have exploded to the upside with rates increasing from 7.58% fee on November 29th to 109.08% fee presently. This sudden and extreme increase is due to stock borrow pressure from additional short selling demand virtually cleaning out stock loan shares available to borrow and lenders now being able to charge a large premium to continue borrowing shares.
On average, in order for stocks with over $100 million of short interest to have stock loan fees over 10% the S3 short interest $ of float would have to be over 20%, but QC only has a S3 short interest % float of 8.72%. The primary reason for this anomaly is that the large majority of QS long shareholders are insiders. With so little stock in the hands of traditional stock lenders such as mutual funds, ETF’s, and hedge funds the overall SQ stock lending pool is comparatively small and therefore a spike in short selling demand can have an outsized effect on stock borrow rates. This spike in stock borrow fees has increased financing costs for short sellers. Shorts are now paying just over $350 thousand/day in stock borrow financing expenses.
QS’s recent stock price rally has turned a profitable short trade into a losing short trade. QS short sellers were up +$6.5 million in net-of-financing mark-to-market profits at the end of October, but -$65 million of losses in November and -$52 million of losses so far in December (including -$30 million in mark-to-market losses today) has turned the trade into a -$110 million losing proposition.
These losses, coupled with alpha devouring stock borrow fees, has turned QS into a high level short squeeze candidate. We should see short sellers with less conviction to start closing out their positions in the face of red P\L numbers and expensive stock borrow costs. If SQ’s stock price continues to climb and stock loan fees continue to trend towards 200% we expect a larger rush for the exits and the size of buy-to-covers to positively affect its stock price.
Looking at short selling trends over time provides insight into overall market sentiment as well as the strength of bearish conviction in individual equities. Our Blacklight SaaS platform and Black APP provides an up to date view of short selling and short covering on an equity, sector, index, or country-wide basis allowing investors\traders to better manage their existing long and short positions.
Research Note written by Ihor Dusaniwsky, Managing Director of Predictive Analytics, S3 Partners, LLC
For deeper insight into short side data and analysis contact me at Ihor.Dusaniwsky@S3Partners.com
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (“S3 Partners”) to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks, and merits, as well as the legal, tax, accounting, and investment consequences, of such decisions.