Authored By Louis Stevens
For the uninitiated, high short interest is a term that refers to the number of shares a company has outstanding that have been shorted by individuals who believe the given company's share price will decline.
High short interest implies that there is a relatively large number of individuals who believe either the company will not perform well or that the company will experience financial difficulty, resulting this company's share price declining.
High short interest generally means that there's a lot of bears (as opposed to bulls who think the stock will do well) betting that the stock won't do well for one reason or another.
Throughout my work as an analyst, I've noticed a trend in which high short interest appears to be a prerequisite for a company to become a "defining American, or global, franchise."
That is, virtually all of the best businesses, which have defined the last 30 years of American capitalism, were heavily shorted at one point or another in their corporate lifecycles.
It's a staggering idea to consider: One would expect the Chipotles, Teslas, MercadoLibres, Nvidias, Amazons, Shopifys and ServiceNows to have been rightfully seen as the "21st century defining" businesses that they have been and are today.
But this was not the case for these companies early and at various points in their corporate lifecycles. No, these companies had serious doubters, as measured by their elevated short interest levels, at various points in their corporate journeys, and especially early in their times as public companies.
Today, we will briefly review a few examples of "21st century defining businesses" that experienced heavy short interest at some point over the last 20 years; then, I will share my understanding of why humans usually decide to try to crucify their most important businesses and figures. It's fascinating, but let's walk through the data first.
MercadoLibre: The Amazon of Latin America
MeracdoLibre is the Amazon of Latin America. It is the region's crown jewel technology conglomerate, and it has grown sales consistently and profitably since it went public about two decades ago.
As such, you'd expect it to be seen mostly in positive light, and, to be sure, that is the case today, but it was not always.
As the chart below illustrates, at one point in the 2010s, nearly 20% of MercadoLibre's outstanding shares were shorted by bears believing the stock would fall for one reason or another.
It's important to note that this thing has been an absolute freight train, so it's almost an act of masochism that bears decided, out of all the possible short ideas, to short MercadoLibre, but, as this exercise will demonstrate, shorts love shorting freight trains that go on to become the best of the best, most defining businesses on earth. Again, I will share my interpretation for why this occurs in the conclusion of this brief.
MercadoLibre's Returns Since It Was Heavily Short In The 2010s
Turning to our next case study...
Chipotle is unequivocally and categorically the defining restaurant concept for public markets in the 21st century.
No other public fast food or quick service restaurant has experienced the business success and corresponding stock price success in the way Chipotle has.
It's genuinely and mathematically the best of the best of the best.
So you'd expect potential bears to understand this data based reality which has been a data-based reality underway for the last twenty or so years.
Not so.
As the chart below illustrates, Chipotle was aggressively and heavily shorted for a whole decade, during which it experienced enormous share price appreciation.
Chipotle's Elevated Short Interest Spanning A Decade
Again, it's really important to note that Chipotle isn't just a good business that escaped the reticles of the shorts.
No, my friend, this is the best of the best of the best of the best... Categorically.
And it was aggressively and heavily doubted as measured by its sustained elevated short interest for about a decade.
The Best Restaurant Concept Of The Last 20 Years Naturally Performs Well
True to the spirit of this series, I will share one last example so as to keep this brief for you.
Tesla.
Whatever you think about Tesla, it's indisputably one of the defining brands of the 21st century.
It's the only successful pure play EV manufacturer in the U.S., and it has grown sales at astronomical rates for the last 15 years.
Moreover, it was founded by Elon Musk, a member of the Paypal Mafia. This group of talented individuals, all of whom came together to found Paypal in the late 1990s, went on to build YouTube, LinkedIn, Palantir, SpaceX, give the first check to Facebook ($500k/Peter Thiel), Affirm, and Tesla. In some sense, these individuals were the Godfathers of the modern day internet economy.
And Elon Musk was one of the most competent and driven of the lot, if not the most.
So, naturally, you'd expect mostly belief that he could pull it off, especially after the company scaled its sales to incredible levels with no competition in sight.
Not so.
Tesla was aggressively shorted for most of its corporate lifecycle, as it turned $10K into tens of millions of dollars over time.
Tesla Turns $10K Into $2.5M At Its High In 2021
Concluding Thoughts: Why Are The Most Successful, Defining, And Important Companies Shorted So Heavily?
In short, this is an evolutionary mechanism for the human species.
Presently, humans have a set of procedures and ideologies that have perpetuated their survival up to this point.
In adopting something new, there's an element of risk, and that risk could threaten the current way of life and, as such, the species' survival.
So humans must attempt to kill new ideas so as to ascertain whether those new ideas are worthy and are durable enough to be integrated into the fabric of society, the primary goal of which is to perpetuate the species.
Enjoying life is secondary to species survival, because there will be no opportunity for pleasure without the species' existence in the first place.
This short interest topic is interesting to me because it represents definitive mathematical representation of this evolutionary mechanism in which humans reject new ideas, new technologies, and new leaders initially so as to test their mettle, and only once they've passed those tests are these new elements integrated into society without skepticism or apprehension from the majority.
In this sense, while you may view the shorts with disdain or reproach at their conservative, myopic ways, they are actually an essential component of the ecosystem of humanity.
They are necessary and essential.
Lastly, it's not just stocks: Think about some of the most popular messianic figures in this history of humanity. For instance, look at your clock. What time is it? For me, it's 8:53 am, Monday, June 17th, 2024 A.D.
We literally base time itself on the guy that we nailed to a cross after flagellating and nearly killing him for a little while...
Think about the lore of Martin Luther King, who was ultimately assassinated after being arrested numerous times for advocating for racial equality around the country.
These were ideologies that "the market of human thought" shorted whereby their value was tested, and, on the other side of the shorting, it was proven that they were the real deal, and, as such, they've become self-evident components of human thought, irrespective of your feelings about them.
To close, short interest should not be seen as a bullish signal in a vacuum, but, in no way, shape, or form, should it be seen as a bearish signal in a vacuum either.
Everything great was shorted heavily initially, so next time your favorite company is being shorted, remember your due diligence and remember this note, and have faith in this curious little human process playing out over time in your favor.
