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Lion Electric short interest: LEV stock price looks for direction amid mixed analyst forecasts

By Alejandro Arrieche

Edited by Vanessa Kintu

14:24, 31 October 2022

Power cable pump plug in charging power to electric vehicle EV car
Lion Electric is a Canadian manufacturer of medium and heavy-duty urban electric vehicles Photo: Have a nice day Photo / Shutterstock

Lion Electric (LEV) has accumulated losses of over 70% so far this year. The combination of a challenging macroeconomic backdrop and the company’s shrinking cash reserves could spell trouble ahead for the electric vehicle (EV) manufacturer.

Short sellers appear to be once again targeting the firm as indicated by the latest increase in the Lion Electric short interest. 

In this article, we take a closer look at how this metric has been behaving lately and at the odds that a short squeeze could happen as a result.

What is Lion Electric (LEV)?

Lion Electric (LEV) price chart

Lion Electric is a Canada-based manufacturer of medium and heavy-duty urban EVs. The company was founded in 2008, its vehicles are the result of more than 12 years of research and development.

By the end of the first six months of 2022, Lion Electric had 700 vehicles on the road. During that same period, it delivered 189 vehicles and produced revenues of $52.2m. The company only generates revenues through the sale of its vehicles. Its portfolio of products includes school buses and trucks.

Lion Electric’s primary manufacturing facility is located in Quebec, Canada. The company employs approximately 1,000 people to run its operations. Its CEO Marc Bedard is also the founder of the company.

In 2020, the company merged with a special purpose acquisition company (SPAC) to list its shares in both the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX). They began trading under the ticker symbol LEV in May 2021.

Since Lion Electric went public, the stock has produced an 84.7% loss. During this same period, the S&P 500 Index (US500) and the US Tech 100 Index (US100) produced losses of 8.8% and 14.9%, respectively.

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What is a short squeeze?

Short squeezes occur when the price of a heavily shorted security unexpectedly rises. This causes panic among short sellers who are forced to buy back the financial asset quickly to close their position to limit their losses.

This spike in buying interest prompts market participants to raise their asking price and creates a possible loop. The higher the price goes, the more shares short sellers buy, which prompts sharper price increases. The loop may continue until the majority of short positions are closed.

Short sellers borrow a financial instrument with the expectation that its price will decline. If this happens, they can buy back the asset at a lower price to settle the loan and keep the difference.

The short interest of a stock indicates the percentage of its free float that is currently being borrowed by short sellers. If the short interest is high, the odds that a short squeeze can occur increase. 

Lion Electric short interest keeps rising as cash reserves keep shrinking

According to data from MarketBeat, the LEV short interest has been rising since mid-September after it steadily declined for several months.

By the end of September, the number of shares borrowed by short sellers stood at 8.41 million resulting in a Lion Electric short interest of 5.6%.  Meanwhile, based on the latest Lion Electric short interest update, borrowed shares jumped to 10.25 million in the first fifteen days of October, pushing the Lion Electric short interest to 8%.

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This sudden change in the stock’s short interest trend comes after months of seeing the metric decline significantly from its February 2021 peak of 23.7%. It appears short sellers have been progressively cashing out the profits made by betting against the stock recently considering LEV’s year-to-date (YTD) loss of 72% loss.

One factor that could explain this latest spike in the Lion Electric short interest is the sharp decline that the firm’s cash reserves have been experiencing. By the end of June, the company had $83m in liquid reserves, a significant decline from $241.7m in June 2021.

During this first semester, the company reported negative operating cash flows of $52.53m and burned a total of $106.72m of its reserves if one includes capital expenditures and the purchase of intangible assets. 

In a challenging macroeconomic environment, companies struggling to generate positive bottom-line performance could face obstacles to raising the capital they need to stay in business.

The fact that the company burned more money in the previous six months than it had in liquid reserves by the end of that same period could indicates that it may be forced to either sell more shares in the open market at today’s depressed prices – which would dilute existing stockholders – or raise money via financing vehicles that could be costly.

What do analysts think about the LEV short interest?

According to data from MarketBeat, the consensus recommendation for Lion Electric stock stood at ‘hold’, as of 31 October. Out of 11 analysts, six rated the stock a ‘buy’, for recommended to ‘hold’, while one rated it a sell.

The average price target for LEV stood at $8.05 a share implying a 185.3% upside potential based on last Friday’s closing price. The highest 12-month estimate from analysts was $13 and the lowest $2.50.

On 21 October, Canaccord Genuity downgraded Lion Electric from ‘buy’ to ‘hold’. A month earlier, B. Riley initiated coverage of the stock with a ‘buy’ rating.

The combination of an elevated average price target for the stock and its relatively high short interest favours the possibility that a Lion Electric stock short squeeze could occur if, for instance, a company-specific development prompts a sudden spike in buying interest. 

Can a Lion Electric short squeeze happen again?

In January 2021, Lion Electric was one of the stocks targeted by retail traders hoping to prompt a short squeeze. Back then, the price rose above $35 a share but then started to decline to its current levels as short sellers closed their positions.

LEV short interest by 15 October, as per data from MarketBeat, was not necessarily high enough to consider the odds of a Lion Electric short squeeze high. However, the fact that it would take short sellers roughly 10 days to cover their positions based on the stock’s average trading volumes at the time of iting (31 October) could favour the possibility of a squeeze.

Even though it is impossible to accurately predict if a Lion Electric squeeze will happen, the variables mentioned above could be setting the stage for one. 

Remember that analysts’ predictions can be wrong. Always do your own research before making any investment decision. And never invest or trade with more money than you can afford to lose.

FAQs

What is the short interest in Lion Electric?

The short interest of a stock indicates how many shares short sellers have borrowed with the expectation that the price of the instrument will decline. This metric is expressed as a percentage of the stock’s free float, which is the number of shares that are currently in circulation.

Will Lion Electric stock go up?

According to the average price target from 11 analysts covering LEV stock, as of 31 October, the share price could rise to $8.05 a share within the next 12 months, implying a 185.3% upside potential. 

However, this shouldn’t be used as a recommendation to invest in LEV stock. Analysts could be wrong and have been inaccurate in the past. Forecasts shouldn’t be a substitute for your own research. Always conduct your own due diligence before trading. And never invest or trade money you cannot afford to lose.

Is Lion Electric a good long-term investment?

Lion Electric is a young company in the up-and-coming electric vehicle (EV) market. Whether it is the right long-term investment for you will depend on your portfolio composition, investment goals and risk profile, among other factors. 

Different trading strategies will suit different investment goals with short or long-term focus. You should do your own research. Remember that past performance is no guarantee of future success. And never invest money you cannot afford to lose.

Markets in this article

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You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
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