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Volkswagen short squeeze revisited? Dwindling positions reflect VOW sentiment turnaround

By Alejandro Arrieche

Edited by Alexandra Pankratyeva

14:02, 22 August 2022

Volkswagen logo and a stock chart
Is another Volkswagen short squeeze possible? – Photo: rafapress / Shutterstock

Volkswagen (VOW3) stock became one of the targets of retail investors in the early 2021s during the so-called “meme stock” frenzy. Back then, traders who frequented the Reddit messaging board Wall Street Bets coordinated efforts to pump the price of various stocks that institutional investors were shorting heavily.

By doing so, they prompted massive buying activity and managed to pull a Volkswagen stock squeeze that propelled the share price to its highest level since the historic 2008 Volkswagen squeeze. With the price of WV stock currently standing nearly 46% below its 2021 post-squeeze high, is it possible that a similar event can happen again?

In this article, we analyse if a Volkswagen short squeeze could happen again, remembering what prompted a similar event in 2008.

Volkswagen (VOW3) stock live chart

What is Volkswagen? Company overview

The Volkswagen company was founded in the 1930s to produce an affordable vehicle for Germany’s middle class. Even though the war disrupted the firm’s efforts to achieve this goal, the company managed to resume operations after the war ended in 1945.

Since then, Volkswagen has become the world’s second largest automobile manufacturer, with revenues exceeding €200bn and nearly 9 million vehicles produced every year.

Volkswagen owns some of the world’s most popular car brands, including Audi, Porsche, Bentley and Lamborghini. It operates 120 production plants, as of November 2021. Volkswagen also employs over 300,00 people across the world. 

The company’s CEO is Oliver Blume, who took over the helm in July this year after the former head of the corporation, Herbert Diess, left. 

What is a short squeeze?

A short squeeze is the name given to a surge in the price of a certain security caused by unusual activity from short sellers, who need to buy the asset to limit their losses.

For a short squeeze to occur, the stock's short interest must be high, meaning that traders have to borrow a significant number of shares as they believe that the price of the security will decline.

If the price of the asset unexpectedly rises, short sellers are forced to buy the stock to close their positions. This spike in trading volumes typically leads to further upward pressure in the price of the security. This results in a vicious cycle that may only come to an end when short sellers have fully covered their exposure to the asset. 

Volkswagen short squeeze 2008

The history of the 2008 Volkswagen short squeeze can be traced back to 2006 when Porsche SE decided to start acquiring a sizable stake in the German automaker. This resulted in the price progressively climbing to higher levels in the following months.

In 2008, short sellers started to bet against the stock as they realised that Porsche would start limiting its purchases after they amassed a 30% stake in VW. 

However, Porsche did not stop buying shares of VW as market participants expected. In March that year, the company revealed that it had actually upped its stake to over 40%, while it also held around 31.5% of the company’s shares in cash-settled options.

Combined with the 20% stake the German government owned back then, it meant that less than 10% of the company’s float was actually available and accessible to traders and investors in the open market.

Volkswagen short squeeze 2008 on a chart

Investment funds had reportedly borrowed around 12% to 13% of the company’s shares. Once they realised the position they were in, they started to buy the stock to cover their open short positions as it became clear that they could be victims of a Volkswagen squeeze. According to International Banker: “Ultimately, those hedge funds that had shorted VW stock ended up losing an estimated $30 billion from their trades.” 

Trading volumes spiked, as there was a supply-demand imbalance since neither Porsche nor the government were willing to let go of their shares. Hedge funds would have to entice holders that owned the remaining 10% of the company to sell their shares.

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On 28 October, the Volkswagen short squeeze price reached an all-time high of €1,005. This event is known as the VW short squeeze of 2008.

Can a Volkswagen short squeeze happen again?

In 2021, the price of Volkswagen stock spiked during the so-called “meme stock” short-squeeze that affected the share price of companies such as GameStop (GME) and AMC Entertainment (AMC).

It appears that the previous 2008 Volkswagen squeeze was considered by traders as an indication that the stock was sensitive to being squeezed again in 2021.

As a result, on 18 March 2021, VOW stock rose to $357.4 a share. However, since then, the price has progressively declined and continues to be on a downtrend as it has failed to make a higher high during that period.

Traders should also mind the difference between Volkswagen ordinary vs preferred share prices. The shares with the ‘VOW’ symbol are ordinary shares. Ordinary shares mean that their owners can get voting rights. On the other hand, shares with the ‘VOW3’ symbol are preferred shares. Preferred shares mean that the owners of these shares have preference in dividend payment and asset allocation in case of liquidation. But, generally, preferred shares do not give any voting rights. 

Incidentally, if we compare the prices of ordinary shares (VOW) and preferred shares (VOW3) of Volkswagen, the ordinary shares (VOW) currently (22 August) command higher prices.

Can another VW short squeeze occur? Data about the short interest of Volkswagen stock is not abundant, as the stock’s primary listing is on the Frankfurt Stock Exchange under the ticker symbol VOW and few websites provide this kind of information for German-listed shares.

As for its American Depositary Receipt (ADR) (ticker: VWAGY), the number of shares sold short decreased from 268,700, as of 15 July, to 267,500, as of 31 July, resulting in a 0.45% decrease during the 15 days ended 15 July. The percentage of shares shorted compared to Volkswagen’s total float stood at 0.01%, as per data from MarketBeat. 

Volkswagen ADR (VWAGY) short interest over time

Based on the stock’s average trading volumes, it would take traders 0.4 days to cover their open positions without necessarily prompting a surge in the price of VWAGY. 

According to data from MarketBeat, VWAGY’s short interest spiked in March this year but has progressively subsided. However, the number of shares that have been borrowed by traders is still exceeding pre-March levels.

Volkswagen stock predictions: Analyst sentiment


Commenting on potential further direction of Volkswagen stock, Piero Cingari, analyst at Capital.com, said:

“Volkswagen (VOW) has dropped 32% year to date, but in previous European recessions, the stock has dropped even more dramatically (-76% in 2008, -40% in 2011, and -60% in 2015).
“The worsening of Europe’s gas crisis inevitably weighs on the margins of German automakers, by raising production costs. Interest rate increases and shrinking real household income in Europe will have a negative impact on car purchases in the near future. As a result, we may not have yet reached a bottom for both VOW and the broader German DAX index.”

Speaking on Volkswagen’s prospects, analysts at Morningstar admitted the company’s efforts to transition to zero-emission electric vehicles from internal combustion engines.  

“Volkswagen is successfully executing a global automotive strategy and has one of the most aggressive plans to transition to BEVs from internal combustion powertrains,” said a Morningstar equity report. 

“In 2023, Volkswagen will launch its unified battery cell strategy that targets an 80% sales volume penetration by 2030 and anticipates a 50% entry-level segment battery cell cost reduction as well as 30% savings in the volume segment,” noted Morningstar equity analyst Richard Hilgert, who pegged the fair value of the company's American Depository Share (ADS) at US$37 and forecast 8% consolidated revenue on 5% volume growth for 2022.

Analysing the famous Volkswagen stock short squeeze 2008 and speaking of recent short squeezes, Angel Tengulov, assistant professor of finance at the University of Kansas School of Business, mentioned that social media platforms can act as a coordination device for retail investors, which in turn can have significant market impact.

“This is a grey area, and U.S. regulators are in the process of establishing the extent to which the coordination was in accordance with stock market regulations,” Tengulov said.
“Regulators really must think about what would be an effective framework and an effective way to enforce this framework in order to prevent market-distorting events such as short squeezes from happening.”

When looking at Volkswagen stock forecasts, it’s important to bear in mind that analysts’ predictions can be wrong. They are based on an analysis of the Volkswagen share price history. Past performance never guarantees future results.
It’s important to do your own research. Your decision to trade depends on your attitude to risk, your expertise in the market, the spread of your portfolio and how comfortable you feel about losing money. You should never trade more than you can afford to lose.

FAQs

What happened in the Volkswagen short squeeze?

In 2008, short sellers were squeezed after market participants found that the majority of the stock’s free float was in the hands of two investors – Porsche and the German government.

Since the number of shares accessible was small, short sellers had to bid up the price to entice current holders to sell their shares so they could close their positions to limit their losses.

How much did VW stock gain during the 2008 short squeeze?

From 24 October to 28 October, Volkswagen stock gained more than 100% in value. At one point during the 28 October session, the stock rose to €1,005, resulting in gains of 377% compared to the previous week’s closing price of €210.85 a share.

What is the biggest short squeeze in history?

The Volkswagen stock short squeeze of 2008 could be the biggest in history. According to International Banker, it reportedly led to losses of $30bnfor all the investment funds that had exposure to the stock.

Markets in this article

VOW3
Volkswagen AG (Pfd)
105.45 USD
-2.25 -2.100%

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