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Yeti Holdings (NYSE: YETI) went from dog of the IPO Class of 2018 to market darling this year. Shares of the high-priced cooler maker had plunged by as much as 25% from their October IPO price by the end of last year, while they've doubled in value over the first three months of 2019.
However, there's a strong undercurrent of doubt surrounding Yeti's stock, one which has caused short interest to soar on the cooler maker. Figures from The Wall Street Journal show the number of Yeti shares sold short has swollen to more than 10 million as of Feb. 28, the most recent information available -- a 29% increase from two weeks prior. That's equivalent to 67.7% of Yeti's float, or the number of shares it has outstanding, making Yeti the sixth most-shorted stock on the major exchanges.
So many investors are betting against Yeti that there are actually no more shares left to borrow. Bloomberg notes that fees charged to short the shares are surging, and have hit the "extraordinarily high" rate of over 30%. In comparison, the cost to short Apple stock is around 0.3%.
Image source: Yeti.
A short story on shorting
Short-selling is the process by which an investor sells borrowed shares in order to bet against a company, believing the price will fall. When and if it does, the investor buys the borrowed shares back at the lower price, and so realizes a profit.
The problem with short-selling is that your potential losses are unlimited. When you go long on a stock (the way most people buy shares), your losses are limited to how much you invested. If you buy a single share of stock for $100 and it goes to zero, then you're out that $100. But when you short a stock at $100, and it increases in value -- and keeps on growing -- you're losses continue mounting, too.
However, many investors begin selling their shares back, or "covering" their short, long before that happens. That can cause the stock's price to rise, which causes more people to cover their short position, until the stock surges, causing what's known as a short squeeze because short-sellers are getting squeezed out of their positions.
Cooling sentiment
So why are investors seemingly so sure Yeti's stock is due for a downturn? While there are undoubtedly a number of factors at play, it likely has to do with the cooler maker's fourth-quarter earnings, which set Yeti's stock in motion higher. Although the results were good, they weren't great, and certainly not good enough in short-sellers' minds to warrant a 41% surge in value in February, followed by another 25% jump so far in March.