What happened
Shares of Jumia Technologies (JMIA 20.84%) blasted off on Monday after its prospects were discussed by analysts on CNBC. As of 3:15 p.m. EST, the stock was up 22%. But today's move isn't an isolated event. In just the past week, Jumia stock has more than doubled and it's up over 350% year to date. For this reason, part of the stock's recent gains could be the result of a short squeeze.
So what
Short Hills Capital Partners Chief Investment Officer Steve Weiss appeared on CNBC's Fast Money: Halftime Report today and talked about his bullish outlook for Jumia. But it's not the first time an analyst has painted a rosy picture. The stock soared in October when Citron Research called the stock a "generational buy" and said it was heading to $100 per share.
Image source: Getty Images.
However, Jumia stock appears to be polarizing among investors right now. In contrast to analysts promising multibagger returns, the stock is heavily shorted -- about 19% of shares are sold short right now, according to Yahoo! Finance. With the stock rising so much so fast, some people who have a negative outlook on Jumia could be getting squeezed out.
When shorting a stock, you lose money when it goes up. You can voluntarily chose to close (known as "covering"). But since losses are theoretically unlimited, brokerages can also automatically trigger to cover a position when the finances of the individual account dictate. And when shorts cover, the process can be a catalyst to send shares higher still.
Now what
Whether Jumia Technologies will generate multibagger returns over the long haul remains to be seen, in my opinion. The company does have some good opportunities in e-commerce, payment processing, and gaming in underserved regions in Africa. But the company has had a hard time scaling its business in the past, which should keep investors somewhat cautious for now.
But to me, the real takeaway today is how risky shorting a stock can be. When you buy a stock (also called "going long") your gains are theoretically unlimited while your losses are limited to what you invested. The risk and reward for shorting is the opposite. And in the short term, stocks can be very unpredictable, as Jumia stock has especially demonstrated during the past week. There are likely short-sellers today being stuck with a loss even though their outlook remains bearish and they could wind up being correct in the long run.
This doesn't mean you can't ever short a stock. But it does highlight the benefits of buying stocks instead of shorting them.
