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Selling Cable Short

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The short-squeeze that sent shares of video game retailer GameStop and movie theater owner AMC Entertainment to dizzying heights late last month helped drive a handful of cable stocks with substantial short-seller interests upward. Now, as the frenzy begins to subside, some investors are busy trying to figure out which stock may be next.    

AMC Networks, Discovery, ViacomCBS, and Fox Corp., all hit 52-week highs on Jan. 27, the height of the GameStop/AMC Entertainment short squeeze that saw shares in those two companies rise by 1,000% and 300%, respectively. Some of the AMC Networks gains may have been due to investor confusion -- AMC Networks is regularly confused with AMC Entertainment and both have similar stock ticker symbols (AMCX and AMC).

“I think AMC Networks were an innocent bystander, they just happened to have the same letters in their symbol,” Moody’s Investors Service SVP Neil Begley said. “They were just collateral damage for a short period of time.” 

AMC Networks declined to comment.

But for the most part, the stocks seemed to be targeted for one reason: they have the biggest short interests in the sector. 

AMC Networks has the largest short position among cable stocks, with 15.6 million shares or 90% of its float held by short-sellers, followed by Discovery (42.6%), ViacomCBS (22.4%). Fox is the only outlier -- its short position is relatively low at 10.5% but the broadcast sector is believed to be somewhat vulnerable to short-sellers.

In a research note, Wells Fargo Securities media analyst Steven Cahall said the gains in the shares were likely due to their short interest, but it was too early to tell what will happen next.

“Net/net we'd say there are a lot of folks on the sidelines with a negative bias on this traditional Media set due to valuation, and looking to be negative as and when catalysts emerge,” Cahall wrote. “We're taking a wait-and-see approach on a market correction, and generally tend to reserve ratings changes for when our fundamental thesis is evolving.” 

Other analysts did downgrade some of the stocks. Deutsche Bank media analyst Bryan Kraft downgraded ViacomCBS from “Buy” to “Hold,” and maintained his $32 per share 12-month price target -- 38% below its Feb. 3 close of $52.06 -- citing the short interest and concerns about the upcoming launch of its Paramount Plus streaming service and a looming NFL contract renewal for CBS in 2023. According to seekingalpha.com, Kraft wrote that “our fundamental outlook has not changed, the share price has -- in a material way.”

Earlier in the week, Citibank media analyst Jason Bazinet downgraded both ViacomCBS and Discovery from “Buy” to “Neutral”, speculating that their recent price rallies were in part due to short covering, according to stock website The Fly.

AMC Networks stock rose the most during the frenzy, rising 48% from its Jan. 22 close, followed by Fox (up 35%). Discovery and ViacomCBS each rose 33.2% during the period. 

For the most part, the lift was short-lived. Most of the stocks have fallen back to their pre-Jan. 22 levels, with Fox closing at $30.28 each on Feb. 3, and AMC Networks closing at $47.00 on Feb 3. Discovery held on to some of the prior gains, as did ViacomCBS, both finishing Feb. 3 at $40.81 and $52.06 per share, respectively. 

But those short-term gains could bode well for other stocks in the sector that have been targeted in the past by short sellers, including Fubo TV, which attributes 72% of its float to shorts, Altice USA (56.9%); Sinclair Broadcast Group (45.4%); MSG Networks (38.3%); and Lionsgate Entertainment (18.5%). While those stocks haven’t seen an accelerated interest yet, that could change quickly.  

“I think any company that has a high short position in it, particularly a company that doesn’t have a huge float, it’s going to be fairly easy for people like the Reddit community to get in there and manipulate those stocks,” Begley said. “If you're talking about much, much larger companies, it’s harder to play that role. Now the Street has wind of what’s going on here, and I think there will be a lot of non-Reddit folks, institutional money, that’s sort of  jumping on board as well.”

He added that Sinclair could be vulnerable because it is involved in two areas facing strong secular pressure -- broadcasting and regional sports networks. Sinclair bought the former Fox Sports RSNs from The Walt Disney Co. in 2019.  Since then, the networks have come under scrutiny as distributors have balked at high rate increases and in some cases dropped networks. In October, the Wall Street Journal reported that Sinclair was considering its options concerning the RSNs

Sports business website Sportico singled out Fubo TV as a potential short-squeeze target, picked by two top hedge fund managers as the next stock retail investors could send skyward. Fubo stock has been on the upswing -- it was up 52% between Jan. 22 and Jan, 25 to $57.47 per share and has risen more than 100% since Jan. 4. But despite those gains it  was still short of its 52-week high of $62.29 each, reached on Dec. 22. 

So there's still room for retail investors that want to participate in a buying spree. 

Cable networks seem to be ripe targets for short-sellers because they too have been pressed by the growing popularity of streaming SVOD services and their own direct-to-consumer offerings. For some, the days when linear networks are no longer the main distribution vehicle for content could be coming sooner rather than later. 

“The great pivot is underway, [but] it's late,” Begley said of the shift to streaming video. “Unfortunately, we were talking five years ago about what they needed to do -- their programming needed to look more like Netflix and their advertising needed to look more like Facebook. It’s finally happening now. We’ll see which ones are successful in being able to transition their businesses and their revenues, and which ones are not.”

Short selling has been around forever and cable and satellite companies have had their run-ins with hedge funds betting on price declines in the past. But interest in short selling was spiked in late January after a group of so-called "amateur" investors found a way to beat the shorts at their own game. 

Around Jan. 25, millions of those amateur  investors, banding together on sites like Reddit’s WallStreetBets, which has two million users, started buying huge amounts of GameStop stock via commission-free apps like Robinhood. That surge in buying, coupled with a short interest in the company of more than 100% when options are included, initiated a "short-squeeze" and drove up the price of the retailer by more than 400% in about a week. Some investors bragged that they had made millions of dollars on the stock’s ascension in a period of days, while vowing never to sell.

News of the run-up on GameStop shares caused some to cheer the action by what they saw as regular guys taking money from the idle rich. After Robinhood limited trading on GameStop and other similarly targeted stocks in an effort to slow down the frenzy, figures as diverse as Tesla CEO Elon Musk, comedian Jon Stewart and U.S. Rep. Alexandria Ocasio-Cortez criticized Robinhood’s action and cheered what they saw as a clever way for common folk to bridge the economic inequality gap. Later, according to some reports, some investors wondered if much of the acceleration in the share price was sparked by other hedge funds participating in the squeeze. 

In other words, the real damage may have been caused by rich guys trying to screw over other rich guys after all.      

But whether the most recent short squeeze was started by millions of former GameStop customers from the safety of Mom’s basement or stuffy investment bankers sipping brandy and complaining about the help, doesn’t really matter. Together they apparently helped drive many a short-seller into a panic and brought into question the entire validity of the stock market. If a band of relatively unsophisticated “normal guys” could manipulate stocks so easily, what does that mean for the overall health of the market? Melvin Capital, the hedge fund that had the biggest short position in GameStop reportedly sold out of that position early, potentially losing billions of dollars. Others took less dramatic hits. According to CNBC, the overall short position in GameStop dropped to 39%  

The concept of short selling has been around almost as long as the stock market itself. In a short sell, an investor borrows stock from another investor, usually a fund, with the promise to pay it back at a later date. The idea is that the short seller gets the stock when it is priced high, and returns it when it is low. In some cases, short sellers can make big money, but there is also a risk that the stock will rise in that timeframe.  

The short-squeeze is fairly easy to do, as long as you have the money and the time to seek out a target. Essentially, short-squeezers look for a stock that has a high short seller interest -- usually more than 20% of its float -- and low liquidity. Next, they have to just keep buying shares at a rate that forces the short sellers to buy their shares early. That combination, particularly in a stock that has a low float, can drive prices skyward. 

In some cases, that can lead to huge windfalls. According to reports, one investor bragged that they turned a $53,000 investment in GameStop into a position worth $40 million during the frenzy. But there were other stories of investors that bought shares on margin and face losing their homes if the price of the stock falls enough.

And therein lies the rub. As the frenzy around the short-squeeze started to wane, shares of GameStop began to plunge. On Feb. 2, less than two weeks after the squeeze began, GameStop shares closed at $90 each, down 60%. On Jan. 28, GameStop shares reached their pinnacle of $483 per share. One month earlier the stock had been trading at $20.99 each. AMC Entertainment shares rose more than 500% during the squeeze from $2.98 per share on Jan. 22 to $20.36 on Jan. 27. The stock closed at $8.97 each on Feb. 3. 

Because in the end, even in the stock market, fundamentals eventually win. GameStop is a relic in an industry where it is easier and cheaper for consumers to download games on the internet. If it wasn’t for sales of physical game systems and less expensive used games, GameStop’s business would be practically nil.

That should remind you of another industry where the threat of internet streaming is eroding its business -- cable. But unlike GameStop, cable companies have shifted gears from relying on the sale of what is quickly becoming a commodity -- content -- and have banked on building out their networks, protecting the cable business from a GameStop-like assault. That, and the fact the stocks for operators were up about 40% last year, usually a turn-off for short sellers. 

Begley said that typically, short sellers seek out companies that are in areas of secular decline and not adapting well. Cable, he said, could arguably be losing the content wars to streamers, but their broadband businesses are thriving. 

“In the cable industry, while they are going to lose the pay TV world over time, they are more than making up with it with broadband,” Begley said. “Broadband comes with very high margins, so people are not concerned about that.”

Mike Farrell

Michael Farrell is senior content producer — finance.