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Facebook is Top Short-Seller Target

June 06, 2012

Facebook Is Biggest Short-Seller Target

Pedestrians are reflected in a window near a display of the share price for Facebook Inc., displayed at the Nasdaq MarketSite in New York. Photographer: Scott Eells/Bloomberg

No large U.S. company is attracting more attention from short sellers than Facebook Inc. (FB:US), amid bets the world’s biggest social-networking company will keep falling after losing $27 billion since its initial public offering.

Short interest on the Menlo Park, California-based company reached 5.9 percent of shares outstanding, according to data compiled by Bloomberg and Data Explorers Ltd., a New York-based research firm. None of the Standard & Poor’s 500 Index companies with at least $50 billion in market capitalization has short interest higher than 3 percent, the data show. Facebook, which has a market value of about $63.8 billion, isn’t in the S&P 500.

Shares of Facebook have slumped 29 percent since they began trading on May 18 amid concern that the IPO was overvalued and the company will struggle to increase profit from its 901 million users. At the time of its debut, underwriters led by Morgan Stanley set a price that valued Facebook at 107 times reported earnings in the past 12 months, more than every S&P 500 stock except two.

“Facebook is one of those companies whose future potential is unknown and unknowable,” said Robert Stimpson, a money manager at Akron, Ohio-based Oak Associates Ltd., which oversees about $900 million and doesn’t own Facebook. “The stock is expensive. The short interest might also reflect a bet that there is more bad news to come and Facebook will be punished.”

Short sellers borrow shares and sell them, hoping to profit from a decline by repaying the loan with cheaper stock. About 37.5 million Facebook shares were sold short as of June 4, compared with an average daily volume (FB:US) of 72.6 million shares excluding the first day of trading, according to data compiled by Bloomberg and Data Explorers.

Average Interest

Short interest among the 52 biggest S&P 500 companies averaged 0.73 percent, according to data compiled by Bloomberg. Visa Inc., (V:US) the world’s biggest payments network has the highest ratio at 2.95 percent, followed by entertainment company Walt Disney Co., at 2.56 percent, the data show.

The eight-year-old social-network’s debut of trading produced the worst five-day return among the largest U.S. IPOs of the past decade. The 13 percent plunge through May 24 exceeded the 10 percent drop by MF Global Holdings Inc. in its first five sessions, according to data compiled by Bloomberg. Facebook, which went public at $38, rose 3.6 percent to $26.81 at 4 p.m. New York time. At that price it’s valued at 58.3 times reported earnings, compared with a multiple of 13.3 for the S&P 500.

‘Somewhat Dangerous’

Facebook and Morgan Stanley have faced criticism for increasing the number of shares to be sold in the IPO by 25 percent to 421.2 million days before the offering and pushing up the asking price.

“It makes a lot of sense to short it, from a valuation standpoint and all the controversy surrounding the company every day and what happened pre-IPO,” Jeffrey Sica, who oversees more than $1 billion as president and chief investment officer at Sica Wealth Management LLC in Morristown, New Jersey, said in a telephone interview. “It’s a double-edged sword because there’s so much short interest that the littlest positive could propel the stock up. You could get annihilated on it. It’s somewhat dangerous right now.”

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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Companies Mentioned

  • FB
    (Facebook Inc)
    • $76.8 USD
    • -1.11
    • -1.45%
  • V
    (Visa Inc)
    • $213.88 USD
    • -2.37
    • -1.11%
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