When a short squeeze occurs, it can be one of the most exhilarating and profitable events in trading. For those who don't know, a short squeeze is when a large number of investors who have sold short are forced to buy shares to cover their positions, which drives the price of the stock up. But what are the biggest short squeezes of all time?
In this article, we will take a look at some of the biggest short squeezes in history and the lessons that can be learned from them. We will also be looking at how high a short squeeze could potentially go with an example using 'Made-Up Incorporated'.
Biggest short squeezes of all time
There has been some recent talk about short squeezes and we thought it would be interesting to take a look at some of the biggest ones in history. Here is a quick list of the top 10 before we go into more detail about each:
1. Volkswagen AG (OTC: VWAGY)
2. Tesla, Inc. (NASDAQ: TSLA)
3. AMC Entertainment Holdings, Inc. (NYSE: AMC)
4. GameStop Corp. (NYSE: GME)
5. Harlem Railroad
6. KaloBios
7. Herbalife Nutrition Ltd. (NYSE: HLF)
8. Piggly Wiggly
9. Northern Pacific Railway
As you can see, short-squeezes happen to big and small companies all over the world. Now let's take a closer look at each of these companies and see how high their stock prices went during their short squeezes.
Volkswagen
In the middle of the 2008 financial crisis, Volkswagen AG (OTC: VWAGY) and Porsche were involved in perhaps the most well-known short squeeze of all time. Porsche which already owned 44% of Volkswagen acquired a large number of shares in Volkswagen, an additional 31% stake. In total Porsche owned 75% of Volkswagen, and since the German state of Lower Saxony owned the remaining 20%, there were less than 6% of the float of shares available.
During the same time, hedge funds and short-sellers had borrowed 13% of the shares to short, which meant they could not cover unless Porsche or the Lower Saxony state decided to sell.
As a result, the short-sellers were forced to buy back the shares they had sold, driving the stock price from €210 to over €1,000 a share. Hedge funds are believed to have lost about $30 billion on the Volkswagen AG bet.
The Volkswagen AG short-squeeze scenario shows that even though a company may be declining, a competitor can acquire and ruin a short position's potential for profits.
It's a great example of how two companies can be intertwined and how short-sellers need to be aware of these relationships when placing their bets.
Tesla
It's estimated that short-sellers have lost over $40 billion by shorting Tesla. Tesla is widely regarded as too expensive, with the company valued at more than three times that of the country's two most important automakers. This has caused the company to be one of the most widely shorted against stocks on public exchanges.
However, short-sellers are yet to see their bets pay off as Tesla continues to perform well. Despite many headwinds, Tesla has continued to excel and its stock price has risen accordingly. The Tesla, Inc. short-squeeze scenario is one of the biggest and most successful in history.
It shows that when a company can perform well despite doubters, its stock price will follow. This is a lesson for investors to be careful when shorting a stock, as the company may be more successful than anticipated.
AMC
AMC owns and operates movie theaters, and as the world evolved to streaming and due to the coronavirus pandemic, there was little faith in the cinema industry. Similar to GameStop's short-squeeze story, hedge funds bet against the success of this company by placing short positions.
Retail investors rallied against the hedge funds and bought into the stock, raising the price by over 2500%. On June 21, data analytics firm Ortex revealed that short-sellers of AMC Entertainment Holdings, Inc. (NYSE: AMC) stock had lost at least $1.2 billion.
The AMC Entertainment Holdings short-squeeze story is one for the ages. It shows that when a group of passionate and committed investors bands together, they can move mountains – or, in this case, the market.
GameStop
In January of 2021, due to the market conditions, it seemed like there was little hope for this retail videogame company. Many hedge funds assessed the situation and decided to place short positions on GameStop's stock.
GameStop Corp.'s stock price rose from less than $5 to almost $325 in six months, fueled by Reddit and famous investors such as Michael Burry and Ryan Cohen. The meme stock was born, and until today GameStop remains one of the most controversial short squeezes ever.
Retail investors took it personally and jumped on the bandwagon along with Tesla CEO Elon Musk and popular investor Chamath Palihapitiya. Short-sellers probably lost around $2 billion throughout this event, according to estimates.
The GameStop short-squeeze story is one of the biggest and most recent examples of how a group of retail investors can come together to cause havoc in the markets. It also shows the power of the internet's ability to help retail investors compete against institutional hedge fund managers.
Harlem Railroad
Harlem Railroad was a forgotten unprofitable railroad that had a highly shorted stock. Cornelius Vanderbilt acquired a stake in the firm and started to accumulate his position in 1862. At the time the stock was trading at under $10 a share. Vanderbilt gained control of the company through his majority stake and began to make some changes at the corporate level.
He was also looking for ways to grow the business, and a rumor surrounding a new line that Harlem Railroad would build pushed the stock to $100. However, according to the history, the City Council was set to approve this new line, and those directly making the decision were short the stock.
In the hope that they could prevent Harlem Railroad from getting the new line, and that would make the stock plunge. The decision by the City Council was to repeal Harlem Railroad’s request for the new line, and that made the stock plunge the next day. But Cornelius Vanderbilt was not going to let them win.
He decided to keep buying all the stock available, and over the next few days, the stock would continue to rise. Eventually, he owned all of the outstanding shares and pushed the stock price so high the short-sellers would be forced to cover over at a stock price of $250. Vanderbilt would make between $3 to $5 million just on this single trade.
KaloBios
In November 2015, former pharmaceutical executive Martin Shkreli took control of biotech firm KaloBios. The company was more than $6 million in debt after its only product failed in clinical trials. Short-sellers tried to use this news to their advantage but Shkreli acquired more than 70% of the shares.
This caused the stock to jump 10,000% in five days. On November 15, the stock fell to a low of 44 cents per share, then rallied to $14 per share on November 18 as panicking short-sellers tried to cover their positions after the Shrekli takeover.
Shkreli announced that $3 million in cash, with another $10 million promised following shareholder approval, would be given to the company. On November 23, KaloBios stock was worth $45 per share.
It subsequently plummeted to around $20 in the weeks that followed, prompting Shkreli to call back the shares. This resulted in the share price jumping back up to $45. But eventually, the stock would collapse, and the KaloBios would file for bankruptcy.
The KaloBios short-squeeze story is a cautionary tale for investors. It shows that even when the finances are clear, things can still go wrong.
Herbalife Nutrition
Bill Ackman, the head of Pershing Square Capital Management, initiated a bearish bet on Herbalife Nutrition Ltd. (NYSE: HLF) in December 2012. Ackman detailed his reasoning for the bet in a presentation at an investor conference. Ackman’s thought that Herbalife was a pyramid scheme, and a whole PR campaign was created in order to promote his short position.
Ackman was right in his insights of shady business practices but failed in his assessment of the company's ability to generate revenues. Ackman was also harmed when rival Carl Icahn, who runs Icahn Capital LP, took a substantial position in the nutrition firm as Ackman had shorted it.
Herbalife Nutrition Ltd. received a $200 million fine from regulators in the years following the Ackman presentation. However, it was not enough to prevent the firm from recovering by increasing sales and cash generation.
Ackman would be forced to close his short position in 2018, and it is thought that Ackman lost approximately $900 million over six years as a result of his short position, while Icahn made the same amount. The Herbalife short-squeeze story shows us that even the biggest and most experienced investors can lose a lot of money if they don't know when to cut their losses.
Piggly Wiggly
Piggly Wiggly was one of the largest supermarket chains in the US during the early 1920s with more than 1,000 branches across the country. The company’s IPO in 1922, attracted a lot of attention from investors. Soon after the IPO, several Piggly Wiggly locations started going under, which led several investors and traders to start shorting the stock.
During this time, the company’s founder Clarence Saunders was not going to take this lightly and decided to take out a $10 million loan to buy back the stock and began buying back his own shares. By early 1923, he owned 99% of all of Piggly Wiggly's outstanding shares, and short sellers were unable to cover their positions.
During all the time that Clarence Saunders was buying the shares, he was also allowing the brokers to lend those same shares, and he demanded that the short sellers return his shares. During this time the stock rose rapidly from$70 to $124 until the NYSE decided to halt trading on the stock. Since Clarence owned nearly 100% of the shares outstanding, there was no way for short sellers to cover their positions.
Clarence Saunders was forced to reach a deal with short-sellers at $100 a share. In the end, Clarence had regained total control over his company, but he took out a loan to do it and ended up paying a higher price than the market valuation of the company after the IPO.
Forced to pay back the loan, Saunders started advertising in magazines and newspapers to sell shares directly to the public. Saunders would eventually lose the company since the loan was not paid back, and the shares of Piggly Wiggly were used as collateral.
The Piggly Wiggly short-squeeze story is an example of how a company can be brought down by short-sellers, and how an individual's need for revenge can result in millions of dollars of losses.
Northern Railroad
The Northern Railroad short squeeze is one of the most interesting ones on this list because it created a wide market panic. In 1901, there were two activist investors looking to take control of the Northern Railroad - James Hill and Edward Harriman.
While both investors kept buying the stock, the stock price kept rising, and there couldn’t be enough sellers. When the stock started rising so much, some investors felt that this upward movement could not last a long time and started shorting the stock. The stock was trading around $150 a share, and due to the constant buying spree from both James and Edward and short sellers looking to cover their shorts, the stock was bid up to $1,000.
Eventually, many of these short sellers that had to buy during the short squeeze were forced to sell other stocks in their portfolios so that they could be able to cover the short positions. This created the panic of 1901, as stocks and indexes started to go down due to forced selling.
Lessons to learn from the biggest short squeezes of all time
These biggest short squeeze scenarios teach us a few lessons. Some key takeaways are:
- When a company is down, it may not be out for the count. There may be more to the story than meets the eye.
- Both an individual and a group of committed retail investors can move the market in surprising ways.
- Be careful when shorting a stock, as the company may become more successful than you can predict.
- Always be aware of the relationships between companies when placing bets.
- Short squeezes can have far-reaching consequences beyond just the financial loss or gain for those involved such as reputation, business relationships, and overall market confidence.
These stories are proof that anything is possible in the world of investing. So, next time you're considering placing a bet against a particular stock, think twice – you never know what might happen.
What was the highest short squeeze in history?
It is clear that the highest short squeeze in history was KaloBios, whose stock price increased from $0.44 to $45, the company would still be delisted after the short squeeze was over, and it eventually filed for chapter 11.
How high can a short squeeze go?
In theory, there is no limit, although there are no infinite short squeezes. The higher the price of the asset goes, the more money the investors who are shorting it will lose. And if enough investors get caught in a short squeeze, it can cause a financial panic.
We saw this happen in the short-squeeze stories mentioned above. And we may be seeing it again now with stocks or any other asset for that matter. Only time will tell. But one thing is for sure: when a short squeeze happens, it can have big consequences.
So keep an eye out for them, as they might just pop up when you least expect it.
Short squeeze example
Here is an imaginary example of how high a short squeeze can go: A group of investors decided to bet against a startup. The startup claimed to have discovered alchemy (a process that involves turning lead into gold).
It's even backed by some notable investors and has gained the attention of retail investors alike. Naturally, short-sellers know that alchemy isn't real and that the company is destined to fail. But they were wrong.
The company did discover alchemy. It has produced so much gold that the stock price went through the roof. The investors who had bet against the market were forced to buy back their loans at a much higher price, incurring massive losses.
This event is known as a "short squeeze." And it's not just limited to stocks and bonds; anything that can be traded can be subject to a short squeeze. Commodities, currencies, and even whole countries can experience short squeezes.
Conclusion
As you now know, a short squeeze is when investors who have bet against a stock are forced to buy it back at a higher price, incurring massive losses. Don't forget the made-up story of the alchemical company along with the real stories involving some of the most popular investors and companies.
They teach us about the different dynamics and possibilities of short-squeezes. These examples are just a few of the biggest short squeezes in history. As you can see, they can have many different aspects that make them unique. So, next time you're considering placing a bet against a particular stock, think twice – you never know what might happen.