Nearly every short seller I know has at the very least a basic understanding of SEC filings. This is because understanding dilution/filings can give you a serious competitive edge. In this blog I’ll explain what I’ve picked up over the years and used to improve my shorting.

Understanding the stock market.

First, you need to understand why companies apply to be on the stock market. A main reasons is to raise equity to continue growing/expanding - to do this companies can add/sell shares of their float.
This is healthy, for example, see below Tesla filings where it raised funds through public and ATM {At The Market} offerings in 2019 and 2020.

Tesla can continue growing and operating at pace by generating revenue through car sales but also by raising equity. It has a very high 800 million float so if shares do get added to the float as a result of dilution it doesn’t burden existing shareholders drastically or affect its market price.

Where to find the filings

I’ve used for more than a year now as they have software that scans filings and puts the findings together in a compact, easy to understand way. There is a small monthly charge discounted if you use jonk87 as a promo code. Alternatively, you can visit BAM SEC or the official SEC website - but things can get a bit complicated when looking at raw filings.

What to look for

While some companies raise funds/dilute in a healthy way, many do not. If a company is heavily diluting its float in an unhealthy way it can create the perfect opportunity for a short. Why? The answer is selling pressure. For example with some of the bigger at-the-market-offerings almost everybody seems to be selling:

  1. ATM offering: is active dilution being sold at the current market price to any bidder willing to receive it.
  2. Short sellers: are selling short because they know there is an ATM which will push the stock price lower.
  3. Longs/investors: are selling because they know everyone else is selling which will force the price down.

The end result can be a catastrophic drop in a stock’s price to the joy of many short sellers that have done their due diligence. A company is most likely to use its ATM when it is out of cash, which is covered in this article by Flash SEC.

Notice estimated months of cash is 0 so the company should now use the ATM to raise funds to continue operating.

A classic case study

The shipping sector was  notorious for heavily diluting their respective floats in recent years and $TOPS was one of the leading tickers to do this.

You can see several 424b5 forms used to actively raise funds through several ATMs and registered direct offerings throughout the first six months of 2020. Each dilution was raising between $6 – $20 million USD.

As a result of $TOPS dilution the share count rose from 8.6m to 39m accounting for a 362% increase. The dip in the graph you see was due to a reverse split, otherwise the numbers would be higher.

The stock was sitting at $0.10 by June 2020 from highs of 1.15 at the start of that year. Worse still, the lower the stock price, the more shares the company has to sell to raise the same amount, repeatedly diluting the float further.
The company wins because it raises money to keep operating, shorts win because they are gifted a lay-up trade, investors, shareholders and longs ultimately pay for it all.

Parting advice.

Understanding these filings overnight is near impossible. You learn to develop a knack for reading filings by comparing the information directly to live price action to get a sense of the bigger picture ruminating behind the scenes.
Now, I hope you’ve been even slightly enlightened.

If you’re looking for a broker that specialises in short selling and trading to the long side, you can use my affiliate link to receive discounted fees whilst gaining access to the hottest, hard to borrow stocks.

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