(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Short sellers have piled back into Snap Inc. (SNAP) stock recently, with 25 million newly shorted shares representing 19 percent of the float. As of August 31, the 25 million newly shorted shares was the largest number of shares shorted on the New York Stock Exchange, according to an article on 24/7 Wall St. The substantial increase is a sign that short sellers remain convinced about the positive future direction of the Snapchat parent's stock price, and that the recent run-up could be ending soon.

Recent Move Higher

Snap shares have risen by nearly 27 percent since the company reported its latest round of quarterly results, easily beating the S&P 500's two-percent return during the same time. Despite the massive run-up, the shorts have come running back into the stock in a big way, as Investopedia had projected on August 29. (See more: Short Sellers Could Be Piling Back Into Snap.)

SNAP Chart

SNAP data by YCharts

 

Borrow Rate Remains Elevated

We previously noticed the increasing borrow rate in the stock around the end of August, when it jumped by nearly three full percentage points as a clue toward the increased likelihood of short sellers re-entering the stock. Since that time, the rate fell to around 4.25 percent from 6.5 percent since September 1.

The lower borrow rate could be a sign that shares are being covered and returned. Or, with the recent lockup expiration, more shares are becoming available to borrow, meaning supply is meeting the borrowing demand.

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Poor Technical Patterns

Snap stock could potentially rise back toward the gap created in the chart in mid-July. To this point, Snap shares continue to move in a higher direction and appear to be trending toward that gap. But it is also unlikely that Snap shares will successfully get through the $17 level immediately should it get back there.

There are two potential reasons; first, that was the IPO price, which means any investor that participated in the IPO may line up to dump the stock at that level. Second, it serves as a formidable technical resistance level on the chart and is likely to be met with a wave of short sellers as well.

 

 

 

Snap is still exhibiting signs that the stock is not out of the woods, and the recent run-up is just a bounce that is likely to fade out. The number of shorts entering the stock, the elevated borrow rate, and poor technical setup point to a stock that is likely to see continued pressure exhibited over the long term.

 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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