If you hear about e-mobility and shortsellers, you probably think of Tesla spontaneously. For a long time Elon Musk’s group fought against large investors who bet on falling prices for Tesla shares. Tesla won the battle, which gave the stock a big boost.
But there is also a group in Germany that those short sellers are betting against: the MDax and TecDax group Varta, based in Ellwangen, Baden-Württemberg. The group is primarily known for its classic battery business. No matter what size, Varta batteries can be found in almost every supermarket.
Varta successful with small batteries in Bluetooth headphones or hearing aids
But there are other areas of business that spark the imagination of both investors and experts. For example, Varta claims to be the main supplier of rechargeable batteries for Samsung headsets. Overall, Varta is even the world market leader for small batteries. In August 2020, the group announced that it would also use its technology for batteries in e-cars.
Varta is therefore active in an industry that will play an increasingly important role in the future. Batteries for cars or e-scooters on the one hand, for hearing aids or Bluetooth headphones on the other hand, will probably be even more in demand in the future than they are today. Investors see it that way too: the share has risen by more than 500 percent over the past three years.
Varta is now valued at just over five billion euros. Varta will not announce sales for 2020 until February, but according to company information it should be around 800 million euros. “This means that the Varta share is already highly valued, despite the strong imagination,” says Alexander Langhorst, Managing Director of GSC Research in an interview with NewsABC.net. He has been analyzing small and medium-sized companies, so-called small and midcaps, for years.
Varta one of the most-shorted stocks in Germany
However, the rapid price increase in 2019 also attracted investors who assume that Varta is already overvalued at this level. Varta is among the stocks that are sold short the most. The short seller rate is currently a little more than eight percent. “Even a company with a good business model is not safe from short attacks,” says Langhorst.
In the case of high valuations in particular, even a small negative message would be enough to trigger a major downward price movement. There was an example of this just two weeks ago: a report according to which the tech heavyweights Samsung and LG Electronics want to manufacture their own microbatteries resulted in a daily loss of more than five percent at Varta.
“Even a broad positioning, which is basically positive, means that shortsellers have the chance that at some point things will not go so well in some area,” says Langhorst. This also results in a point of attack.
This is how short selling works
When they sell short, investors borrow stocks that they later have to return for the same price. So you sell the securities at the current price and want to buy them back at a later point in time at a lower price. The difference is then your gain. The problem: If the price rises contrary to the expectations of the short sellers, the investors have to buy back the share at a higher price and make a corresponding loss.
While the short rates in the US are significantly higher, investors in Germany tend to associate the process with negative things. “One reason for this is that the stock exchange is still too far away for many Germans. On the other hand, however, that you often only hear negative examples in the media, ”says Langhorst.
Occasionally there are high short rates at a company and shortly afterwards an analysis of a company that has barely been noticed and reports extremely negative about the company with the high number of shortsellers appears. “Such things are typical negative examples. In the US, however, it is much more normal for investors to bet on falling prices, for example to make money on a bear market or to insure custody positions, ”explains Langhorst.
Some investors are hoping for a short squeeze
In this case, investors put a short product in their portfolio that cushions the losses of the other positions in the event of a price slide. In the case of Varta, the shortseller quota has been falling in recent days. As the investor magazine “Der Aktionär” reports, Tiger Global Management recently reduced its short position from 0.74 to 0.62 percent. This 0.12 percent corresponds to around 48,500 shares with a value of 5.8 million euros. D1 Capital Partners has even reduced its short position from 1.30 to 1.17 percent, the report said. At some point, the risk that shortsellers will continue to rise contrary to their expectations becomes too great for them.
With currently around 130 euros per share, the Varta share has again reached the upper end of a longer sideways movement. “If the share leaps over its all-time high of around 139 euros, more buyers will be attracted and the losses in shortsellers will increase,” explains GSC Research Managing Director Langhorst.
If many shortsellers leave their positions at once, a so-called short squeeze occurs. Investors have to buy back the stock at a much higher price, which increases demand and makes the price rise even further. As a result, other shortsellers are also forced to sell, which drives the price further up. Especially with stocks with many shortsellers, a rapid upward price movement can arise in this way.
“Just because of the hope of a short squeeze one should just as little feel encouraged to buy the share as one should be put off by a high short rate,” advises Alexander Langhorst. More important are fundamental data and the question of whether a company has enough imagination to pay the current share price for it.