Owlet (OWLT), a company who helps parents keep their babies safe and greatly reduce the risk of SIDS (the leading cause of death among infants), has likely become the most shorted stock in the world. Yes, but how is this possible and why are short interest websites not showing this yet?
OWLT just officially IPO’ed last Friday after going public through a SPAC (formerly SBG) and so all the financial websites have not updated its short interest and/or total float yet. One of the unique things about a SPAC is that right before the official IPO or “merger,” a shareholder can trade in their shares for their net asset value of $10 instead of actually holding shares in the company. What’s been happening recently though is that large hedge funds buy up all the shares they can get at ~$9.98 right before merger and then trade them in for their $10 cash trust value for a guaranteed 0.2% profit. For every share that is traded in, the company will receive $10 lesson funding and there will also be one less share in the total float after the official IPO.
The Short Position Is Taken: With SPACs getting smacked across the board recently, a profitable strategy has been to short shares prior to the official IPO since that is when the $10 floor is removed for a SPAC. Therefore, Hedge Fund ABC sees an opportunity in shorting OWLT in anticipation of it dropping in price after merger. So, they short as many shares (1.77 million) as they can. More specifically, a large chunk of those shares were shorted at the end of June when the stock was at $10, which for the most part would only be done by a principle short planning to hold their short into the SPAC. At the time, OWLT had 23 million shares total, so it wasn’t THAT high of a short interest ratio.
The Total Available Shares Reduces by 86%: As mentioned in the background, there have been an increasing amount of SPAC shares bought by hedge funds and traded in to secure a 0.2% profit. So, Hedge Fund XYZ decides to do this with OWLT, which was trading at $9.97-9.98 for about a month before the official IPO date. Ultimately, they buy up an incredible 86% of the float trade them in for $10 before merger. Sure, Owlet now has 86% less of the cash in the SPAC trust to make their life-saving baby products but oh well, hedge funds got to get paid their 0.2% ya know? As a result, this removes 86% of the shares available from the total float, which means that the original 23 million float is reduced to only 3.24 million shares.
Putting It Together: With these two moves, OWLT now has a float of only 3.24 million shares with 1.77 million of those shares sold short based on the most recent data from the end of June. (Could there more or less shares shorted since that time? Yes, but I’m guessing if anything short interest got even higher since almost every SPAC these past two weeks has been dropping like a fly after their official IPO debut, further confirming the hedge fund’s short strategy.)
With 1.77 million shares sold short, this would equate to a short interest ratio of 54.6%, which according to HighShortInterest would make it by far the most shorted stock in the world with second place coming in at 39.14%. They don’t have OWLT at the top of the list right now because financial websites have not updated the total available float as the company technically just went public on Friday (July 16).
Given the information, I wouldn’t want to be short the stock in a situation like this. I’m betting that the people who are, are unaware of the situation and might get caught very off side. Being caught off side, in size, is a very tough spot to be in especially considering the low volume/float. It’ll be interesting to see what happens in the coming days.
This article was written by u/Hardcoreposer7.
