Don’t Fear the Big, Bad Short Sellers

Income Investing

For an investor, few things are as unnerving as realizing that there is a concerted short-seller attack on one of your stocks. Over recent months, I have guided my Dividend Hunter subscribers when a couple of our stocks were subject to short-seller attacks. If you understand what the short sellers are trying to do and the shares you own, you can turn these scary moments into profitable opportunities.

Here’s how.

Mysterious person shadowed in hoodie

To sell a stock short, a trader borrows shares from his broker. Those shares are sold in the market to repurchase them at a lower price, profit from the share value decline.

For shares of a stock to go down, investors who own the stock must pick up the belief that it will happen and get fearful about staying in the stock. When a stock starts to fall, often fear begets fear, and the share price can quickly drop.

Unscrupulous short sellers can put out a hit-piece research report predicting the imminent downfall of the targeted company. These reports come from firms you’ve never heard of but get picked up and posted by financial news websites, which gives them an air of legitimacy. Investors read the news releases forecasting the demise of a stock they own, and the first reaction is to sell, sell, sell. The selling causes the stock price to crater, and the short-selling firm that published the report laughs all the way to the bank.

These reports are typically filled with factual errors. Lots of jargon is employed to sound good, but if you understand how the company operates, it can be pretty easy to see how facts and thoughts were manipulated.

When a short seller attack goes after one of my Dividend Hunter recommended stocks, my subscribers quickly fill my email inbox with questions. I research the allegations and advise subscribers on the proper course of action.

The Dividend Hunter recommended investments list includes only the highest-quality, dividend-paying investments. Companies can go bad, or businesses stop operating as expected, but these events happen slowly and not because of a short seller hit piece.

In early March 2023, Dividend Hunter stock Arbor Realty Trust (ABR) was hit by one of these published short seller reports. The ABR share price lost a third of its value in a few weeks. Other short sellers piled on with reports they were shorting the stock, and my subscribers were very worried. I checked the reports, determined they were bogus, and told subscribers it was a good time to pick up ABR shares “on sale.”

It worked fine, and in a couple of months, the stock was above the pre-short attack price and up about 70% off the recent low.

Short sellers go after quality companies like Arbor because they have small market caps and very little if any, real news between quarterly earnings reports. In this type of news environment, a short attack can get some traction and scare sellers into selling before they get some real answers.

Recently, Bloomberg published an article that noted short sellers lost $195 billion in 2023. Bloomberg also said short sellers lost $242 billion in 2020 and $142 billion in 2021. Only in the bear market year of 2022 were short sellers profitable, with net gains of $300 billion. The moral is that short sellers are wrong more often than they are right, at least as far as their profits go. Believe in your analysis if one of your stocks is hit by an out-of-the-blue short attack. Or better yet, subscribe to the Dividend Hunter and let me help you. Click the link below to see how.

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