Shares of ANGI Homeservices (NASDAQ:ANGI), which operates a website that connects consumers with service providers, saw its stock jump 12% or so in the first half hour of trading today. Although there was an SEC filing about a change in stock ownership, revealing that an institutional investor reduced its position at the end of last year, that probably wasn’t behind the big uptick today. The market mayhem around short-selling is the far more likely culprit.
Swift price moves for a stock based on little or no news can be disconcerting for long-term investors and particularly for those of a conservative bent. Sometimes such changes are an anomaly that’s hard to explain. But recently a large number of companies have had hard-to-explain price moves of shockingly large proportions. For example, ANGI’s 12% gain in 30 minutes is a rounding error compared to the headline-grabbing advances in stocks like GameStop these days.
The big story behind all the volatility is so-called short squeezes. When an investor shorts a stock, they are basically selling something they don’t own. The hope is that the stock falls in value and it can be bought at a lower price to close out the position at a profit. However, if the stock goes up, a short-seller loses money. If the price goes up enough, short-sellers start to close their positions to limit their losses. In a short squeeze, stock traders attempt to push up a stock specifically to force short-sellers out, knowing that at some point short-sellers will sell just to curtail the pain.
A short squeeze can be shocking to watch, and today it appears that investors are actively looking for stocks, like ANGI, that have notable short interest. Websites dedicated to the search are getting traders to push stocks higher with the sole purpose of causing short-sellers pain. The thing is, this type of trading has little to nothing to do with the actual fundamentals of a company. Indeed, there’s usually a reason a stock is being sold short in the first place.
For example, ANGI’s monetized transactions fell throughout the fourth quarter, suggesting that whatever boost the company got from people staying home because of the coronavirus may be petering out. Including today’s move, the stock is up more than 200% since April 2020. It’s not unreasonable to conclude that it may have moved too far too fast. More aggressive investors, meanwhile, might sell the stock short thinking it will dip back down if results show that the pandemic-driven performance boost was temporary. But then, in a short squeeze, none of that matters because the driving force is investor sentiment.
Don’t read too much into the price change in ANGI Homeservices today. The market is very volatile of late, and emotions are leading to strange trading action. It’s likely that ANGI has been caught up in that action. In other words, if you want to buy, or sell, ANGI, take the time to dig into the actual business before making a decision.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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