Episode 608: Shorters Gonna Short : Planet Money We look at the ten most shorted stocks out there, to see what this list tells us about human nature and the economy. Plus, we end our shorting experiment.

Episode 608: Shorters Gonna Short

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DAVID KESTENBAUM, HOST:

Back in January, we had a great idea.

SAHM ADRANGI: Yeah, that's a terrible idea.

KESTENBAUM: Or not. We were going to short the entire stock market. Place a bet that would go not up, but down.

ADRANGI: It's very dangerous and it's a great way to lose lots of money.

ROBERT SMITH, HOST:

That's Sahm Adrangi there. He runs a hedge fund. He knows way more about money than we do, so we ignored his very wise advice.

(SOUNDBITE OF PHONE RINGING)

STEPHEN PEARSON: E*TRADE Elite client services. This is Stephen Pearson.

KESTENBAUM: We did it through an E*TRADE account. I want to short something.

PEARSON: All right.

KESTENBAUM: I want to short the entire stock market.

PEARSON: The entire stock market.

KESTENBAUM: It was surprisingly easy to do. Sahm had jokingly called this the Armageddon trade, since our investment would pay off under that particular scenario. But we did it not because we thought the end of the world was coming, we did it because we wanted to explore this hidden world of short selling.

SMITH: Most people are hoping that things will go up. People are always talking about what stock to buy, but things do not always go up. And there is this other way you can bet - you can short something, which is what we did. We shorted the stock market. We shorted America. And so America's bad news became our good news.

KESTENBAUM: It's been weird. It's been lonely. It's been fun.

(SOUNDBITE OF SONG, "COUNTDOWN")

BEYONCE: (Singing) Oh killing me softly.

KESTENBAUM: Today is our last installment in our series of stories about shorting. We're going to bring you some numbers that you never get to hear - the top ten list of most shorted companies. Some really interesting stories in there.

SMITH: And we are going to bring to an end this little experiment of shorting the stock market. We will tell you how we did.

KESTENBAUM: Not very well.

SMITH: Say your name, man.

KESTENBAUM: I'm David Kestenbaum.

SMITH: I'm Robert Smith. Welcome to PLANET MONEY.

(SOUNDBITE OF SONG, "COUNTDOWN")

BEYONCE: (Singing) There's ups and downs in this love. Got a lot to learn in this love. Through the good and the bad, still got love. Dedicated to the one I love.

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(SOUNDBITE OF SONG, "COUNTDOWN")

BEYONCE: (Singing) Killing me softly and I'm still falling. Still the one I need. I will always by with you.

KESTENBAUM: A lot of stock data you can get updates on every second, every tiny fraction of a second. But if you want information about which stocks are being shorted, you have to be a little more patient. The official numbers come out - are you ready? Once every two weeks. So the day finally rolled around. I was excited. Robert, you had forgotten?

SMITH: (Laughter) I had totally forgotten.

KESTENBAUM: So I went to grab you. You were cleaning.

SMITH: I love cleaning. I do. I clean when I'm nervous.

KESTENBAUM: And you were singing.

SMITH: (Signing) It's beautiful MacBook Air. I want to keep this box 'cause it's so lovely, but who keeps a box? A box is dumb.

KESTENBAUM: Do you know what time it is?

SMITH: It is 3:55.

KESTENBAUM: You know what that means?

SMITH: It means it's almost time for shorts. It's time for the shorts. I'm such an idiot.

KESTENBAUM: We ran to your desk. We sat at the computer clicking - reload, reload, reload - on various websites. And then there they were. The numbers were out.

SMITH: Now in order to make sense of this list of most shorted companies, we needed to find someone who had actually read it before, because we're first-timers and there is a lot of numbers going on in this thing. But we found somebody, Paul Kedrosky, Venture capitalist and blogger. He used to work for HSBC analyzing stocks, and he loves this list of shorted companies.

PAUL KEDROSKY: Oh yeah. No, it's great. You know, there's a whole bunch of reasons to look at it - not least of which it's usually, you know, kind of an interesting sign of what current wackiness is going on in the market, so yeah.

KESTENBAUM: What do you mean?

KEDROSKY: Well, you know, there's a story, right? I mean, behind every one of these there's usually a really entertaining story. Much more so in many ways than, you know, if you look at the stocks that people tend to own. You know, that's dominated by Apple today. Well, that's not a very interesting story. I mean, everybody knows what's going on with Apple. But, you know, you look at the most shorted stocks, it changes a lot and you know, behind every one of them is some kind of, you know, wild story about something that has the potential to implode and,, you know, catastrophes are always fun.

KESTENBAUM: All right. Let's start the list. And let me first say we do not have anything against these companies. We are not saying they are going to fail. We are not saying anything other than there's a lot of shorting going on of their stocks.

SMITH: Which is funny that we even need to make that warning because if we were talking about the top-performing companies, people wouldn't be like oh, you're not saying they're going to win. Like those are just facts. Everyone reads that list. But here it is, we are going to do this anyway. We're going to go from number ten most shorted company to the number one most shorted company, stopping at just a few places to give you a little more of the story. Honestly, I didn't know what a lot of these companies did or what they were.

KESTENBAUM: All right, let's do the list. No. 10 is JAKKS Pacific, Inc., a toy company. No. 9, Wayfair Inc., an online department store. No. 8, ITT Educational Services, Inc.

SMITH: No. 7, Conn's Inc., electronics and appliance store. And at No. 6, King Digital Entertainment plc.

KESTENBAUM: Let's do King. So King is a videogame company that I didn't realize - they made this game I see people playing all the time on the train.

(SOUNDBITE OF CANDY CRUSH INTRODUCTION)

SMITH: You may have played it and you didn't know, but this is King Digital Entertainment's big product.

KEDROSKY: Their specific one was Candy Crush.

KESTENBAUM: Oh, they're Candy Crush?

KEDROSKY: Yeah, these are Candy Crush.

SMITH: Oh, now I...

KESTENBAUM: The Candy Crush company is on there?

SMITH: Now I'm interested.

KEDROSKY: (Laughter) Yeah, so if you're a big Candy Crush fan, you're on the other side of this particular trade.

KESTENBAUM: With most companies when there is a disagreement over how well the company is doing, the discussion is often pretty civil because the differences in opinion can be small. If you're talking about General Mills, maybe someone says, oh, you know, I think the sales of Cheerios is going to go down a little bit this year so I'm going to sell my shares.

SMITH: Yeah, and I may have a slightly different view of the future. I may say like, oh no, I think there's going to be a slightly more demand for Cheerios, so I'm going to buy those shares. It's going to go up. I mean, we could have a discussion here about the company that is very civil.

KESTENBAUM: In order to end up on the list of most shorted companies, you really have to have two totally different stories that people are telling about what's going to happen to the company, two complete opposite stories with totally different endings.

SMITH: Yeah, you need one set of people who say this, this is going to be gangbusters - this company - and another set of people going like, you are completely crazy. There is an entirely different story here. So in the case of Candy Crush, King Digital - the one story, the story that a lot of people think about the company is they made this amazing game. They are geniuses. They are going to just make good games until the end of time and I want to bet on that company and I want to buy that stock.

KESTENBAUM: That's the story people who buy the stock tell. There is another story you can tell with a very different ending.

KEDROSKY: The history of companies like this is that it's very difficult to do sort of the next thing. There's no sort of Candy Crush two, three and four. And then there's often, you know, no related game they come up with. So they have this rapid rise and then this complete collapse.

SMITH: I love this because in this story of this one company, you have this really deep question about the nature of success. You know, when somebody has a big hit, are they super talented geniuses who can do it again again? Or was some big part of it just luck? OK, let's keep going down the list.

KESTENBAUM: No. 5, Goodrich Petroleum Corporation.

SMITH: No. 4, 58.com, a Chinese company.

KESTENBAUM: No. 3 - all right, number three we are going to talk about with a different person who knows about shorting because he does it a lot.

JOHN HEMPTON: I am John Hempton, Bronte Capital. I'm a hedge fund manager in Australia. And I'm fairly well known for shorting companies run and promoted by people who you wouldn't want to have marry your daughter.

KESTENBAUM: I got to go on the record and say I think short sellers are funnier than folks on the other side.

SMITH: (Laughter) I agree. Hempton is known for shorting a Chinese software company that turned out to be committing fraud. We are not suggesting that is what is going on with this next company.

KESTENBAUM: The number three most shorted company is a pharmaceutical company called INSYS Therapeutics.

SMITH: When you think about what it takes to land a company on the most shorted list, they tend to be companies with the possibility that something dramatic will happen to them - something dramatically bad. That's what people are betting on. And so you have to ask yourself what could take down a business that is otherwise chugging along, doing well? The government.

KESTENBAUM: Hempton says that is why INSYS Therapeutics is on the list. INSYS sells a pain medication, a very powerful one called Fentanyl.

HEMPTON: It's actually about 20 times stronger than heroin. And the classic legitimate user of Fentanyl is a terminal cancer patient who has very sharp but irregular pain. And you allow them to take a Fentanyl lollipop so that at least they can have some reasonable quality of life with their family.

SMITH: Not surprisingly, Fentanyl has also been showing up on the illegal drug market often mixed in with heroin. And there have been a bunch of overdose deaths linked to it. Hempton says the short sellers have raised questions about this particular company's sales tactics. And they're betting that someday, maybe someday soon, the government might intervene.

KESTENBAUM: I reached out to INSYS therapeutics, did not hear back.

SMITH: OK. Back to the list. No. 2, the second most shorted company is Pilgrim's Pride Corp. They sell chickens. And as tempted as we are at PLANET MONEY to talk about chickens, we have to get to No. 1 because it's awesome.

KESTENBAUM: Before I say it, let me just admit, I did not know a lot about a lot of these companies. The No. 1 shorted company, I do know. It is GoPro.

SMITH: They make those little cameras that you can mount everywhere. People wear them while they are skiing or mountain biking or jumping off of cliffs.

KESTENBAUM: Or eating cereal. I saw a video online of a guy eating cereal while wearing one. He put it on his wrist so, you know, you could see the cereal going into his mouth.

SMITH: His big, gaping mouth, and you could see the spoon going in.

KESTENBAUM: Yeah. He had, like, dramatic music. I think he was making fun of the normal GoPro commercials.

SMITH: This highlights attention. I mean, this is obviously a great product. It is a very popular product. But Hempton says maybe GoPro is too popular. There are two opposite stories you can tell about this company. Either, once again, they are geniuses. Or, he says, there is another particular story that people who have shorted GoPro tell.

HEMPTON: It's a standard craze sort of story. If you look at technology toys, most of them have three- or four-year life spans. And does anyone here remember LeapFrog, which made children's - you know educational children's toys that were beloved by parents for about two years?

SMITH: Yes. I remember LeapFrog very well. My kids, at the end of those two years, owned about six or seven of them. And I swear I still see them in the back of the closet. They don't touch them in more.

HEMPTON: There's a reasonable chance that in three years, somebody makes a GoPro-type camera that's just as good as a GoPro, is just as attractive to my 14-year-old kid who mounts it on the bike and wants to play with it, and it costs $50. And like most technological devices, eventually the price collapses to the point that it's a toaster. I have a joke that every technological device eventually becomes a toaster.

KESTENBAUM: A toaster is something that lots of companies make and that no one can make much money off of because they all toast bread pretty well.

SMITH: I love it. This is the second thing that can land you on the most shorted list. Your company faces the toaster problem. It makes something that people love, but it's in danger of becoming a commodity, something ordinary that you cannot make a lot of money from.

KESTENBAUM: It's possible GoPro can avoid the toaster problem. Apple, for instance, has avoided the toaster problem. The iPhone is not a toaster. They keep coming out with new iPhones with more features that people want to buy. So maybe GoPpro can do something like that or maybe it can branch out somehow. I did reach out to GoPro for comment.

SMITH: And they did not call you back I'm guessing.

KESTENBAUM: I did not hear back.

SMITH: For all the controversy that's contained in this list, Paul Kedrosky, the first guy we talked to, says when he looks at what's on the list of most shorted companies today, he actually finds it calming. You should've seen, he says, back in 2008. In 2008, looking at this list was a scary, scary thing.

KEDROSKY: You won't be surprised to hear it was dominated by, you know, financial companies, in particular by, you know, mortgage insurers.

SMITH: In fact, yeah, maybe if you think of it that way, this is a sign that the economy is in pretty good shape if the things that are most shorted are recreational items like GoPro and video games.

KEDROSKY: Right. Right These are not the ticking timebombs of capitalism, right. Weirdly enough, this is a sort of a backdoor sign of, you know, an improving economy and, you know, sort of a relatively resilient economy. It's exactly the sort of stuff you would expect to happen in a, you know, just sort of a day-to-day world sort of boring capitalism.

KESTENBAUM: So I should feel good looking at this?

KEDROSKY: You should feel very good. This a very happy list, weirdly enough.

KESTENBAUM: The economy has been doing pretty well recently.

SMITH: Especially in the last six weeks. And believe me, we have been paying very close attention to the stock market over the last six weeks because - remember? - we bet it was going to go down.

KESTENBAUM: It did not go down, which is, of course, bad news for our little experiment. This was not a good 6 1/2 weeks to be shorting the stock market.

(SOUNDBITE OF PHONE RINGING)

PEARSON: Thank you for recalling E*TRADE Financial. This is Stephen Pearson. How can I assist you today?

KESTENBAUM: I called backed Stephen Pearson at E*TRADE, they guy who had helped us short the stock market back in January.

PEARSON: Hey, David. How are you doing there?

KESTENBAUM: Good. Nice to talk to you again.

PEARSON: Yeah. Same here.

KESTENBAUM: It's been a great - what is it? - 6 1/2 weeks for the stock market, huh?

PEARSON: It has been.

KESTENBAUM: Can you actually look and see how much the stock market has gone up since we did this?

PEARSON: Yeah. Let's see. So yeah, I think we're at almost 6 percent.

KESTENBAUM: Up, the stock market?

PEARSON: Correct, yeah.

KESTENBAUM: Which is bad for us.

PEARSON: It is bad for the trade.

KESTENBAUM: (Laughter). All right, well, I think it's time to end it.

PEARSON: All right. Well, we'll get you out here. We currently got...

KESTENBAUM: Robert, you want to know how it all shook out?

SMITH: I do.

KESTENBAUM: We had invested about $400 shorting the stock market. Because the stock market went up about six percent, we lost about six percent, which was 22 bucks.

SMITH: But there's more.

KESTENBAUM: Yeah. If you add in fees - you have to pay to do the trade - we lost more. We lost a total of $42. That would be a negative return of about 10 percent on our investment.

SMITH: A negative return of 10 percent in just six weeks.

KESTENBAUM: Yeah.

SMITH: You're fired.

(LAUGHTER)

SMITH: I'm sorry, but you are no longer our money manager.

KESTENBAUM: Let's give it to Stacy.

SMITH: We'll give it to Stacy next time. Was there, at any point, a minute moment at which we could've traded out of this short and made money on this?

KESTENBAUM: Yeah. The best time would've been if we'd gotten out on February 2 at 10:06 a.m. and two seconds. The market was down a little bit then. We could've made about four bucks before fees.

SMITH: Oh, before fees. So we would've lost money no matter what.

KESTENBAUM: Yeah.

(SOUNDBITE OF SONG, "NA NA HEY HEY KISS HIM GOODBYE")

STEAM: (Singing) Na, na, na, na. Na, na, na, na. Hey, hey, hey, goodbye.

KESTENBAUM: A little note about how we calculated our top 10 list. There are actually a number of ways to do this. We used data from The Wall Street Journal webpage. And we were ranking by what's known as percent of float. So it's basically the number of shares that were shorted divided by the total number of shares that are out there being traded. And these are the numbers that were released on February 25. As I say this, they are the most current ones we have.

SMITH: There is a great opportunity for you, the PLANET MONEY listener.

KESTENBAUM: It does not involve money.

SMITH: You should not have us invest your money. We just want your opinions. NPR set up a new webpage where you can talk about radio shows and podcasts. Tell us what you love, what you want to change, new podcasts you might like. You can tell us at nprlistens.org. That's nprlistens.org.

KESTENBAUM: Our show today was produced by Jess Jiang. Thank you, Jess. I'm David Kestenbaum.

SMITH: And I'm Robert Smith. Thanks for listening.

(SOUNDBITE OF SONG, "NA NA HEY HEY KISS HIM GOODBYE")

STEAM: (Singing) Na, na, na, na. Na, na, na, na. Hey, hey, hey, goodbye. Na, na, na, na. Na, na, na, na. Hey, hey, hey, goodbye. Na, na, na, na. Na, na, na, na. Hey, hey, hey, goodbye.

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