Why Are So Many People Shorting Tech?

Earlier this month, all of the FANG stocks -- Facebook, Amazon, Netflix, and Alphabet (Google) -- unexpectedly dropped over 1% in a matter of minutes, and there seems to be an increasing interest in shorting the biggest tech players.

In this clip from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and senior tech specialist Evan Niu explain what investors need to know about short-selling -- what it means, how it works, and the most important numbers to understand -- to start to make sense of this trend.

A full transcript follows the video.

This video was recorded on June 16, 2017.

Dylan Lewis: Last week, we saw that weird flash drop that all of the FANG stocks experienced, it was like 2:44 PM on Thursday or Friday and they all dropped around 1.5%. Looking at some headlines that I saw this week, there seems to be some other ominous feelings, at least in the market, two in particular that kind of caught my eye and were the impetus for today's show: "Apple (AAPL 0.51%) and Tesla's (TSLA -3.40%) Shares Are Two Of The Biggest Shorts In The World Right Now" -- that's MarketWatch. Then, "Wall Street Is Betting Against Tesla and Alibaba Like Never Before," coming from Fortune. The basis of these news items is short interest in these companies. This is a topic that we've touched on a little bit in the past, Evan, but I figured that today we would take on that topic, talk about some of the different ways short interest can be stated, and then maybe why people are betting against Tesla and Apple a little bit.

Evan Niu: As a quick primer for anyone who's not too familiar, short interest is basically how many shares are being held short against the company. There are a couple ways to look at it, I think we'll touch on these. You can either look at is as a percentage of shares outstanding or, alternatively, percentage of float. I think these headlines you mentioned before measured them in dollar terms, because it makes for a good headline, that there's billions of dollars being bet against these companies. You just look at the number of shares times how much they're worth, and you get a number, you get a good headline.

Lewis: So, you mentioned the two different calculations there. If you've seen this data as a percentage, it'll either be basically the number of shares sold short divided by shares outstanding, or the number of shares in short positions divided by the percentage of float. Do you want to talk about the difference between shares outstanding and float? Because I'm sure there's some folks out there who don't really know that distinction.

Niu: Sure. Shares outstanding is pretty much exactly what it sounds like. That's the total number of shares that are out there that a company has issued. But you have to acknowledge that some of their shares cannot be freely traded. The most prominent example of that is all the shares that insiders hold, which is usually very substantial. Insiders have all sorts of restrictions on when they can trade their shares. So, a lot of those shares are considered restricted and not freely traded. So, some portion of shares outstanding is always going to be locked away, effectively. Float is what's left. Float is basically everything that's out there that is readily tradable that is currently trading, pretty much anything that's not restricted. Float will always be less than outstanding. I think, that's why most of the time, when people look at short interest, you can take it as a percentage of float, because you want to know the percentage of what's out there, because obviously the stuff that insiders are holding, they're just sitting on it, and that's not going to affect the market price, because those shares aren't really being traded.

Lewis: And I think when you're looking through those two numbers, just to help you reason through it, the percentage of shares held short or the short interest as stated by float will always be higher. You can't have a higher number of shares in float than in shares outstanding.

Niu: Right. I think both are useful. It's always good to keep an eye on both numbers.

Lewis: Yeah. Looking at some of the numbers that catch your eye when you're looking at the companies by short interest, if you're going by shares outstanding, GNC Holdings is near the top with over 40% of shares currently tied to short. If you're looking by float, Sears is one of the most heavily shorted stocks out there in the S&P 500. They have about 75% of float currently held short.