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AXT Inc. Message Board

  • gggl gggl Aug 14, 2010 8:38 AM Flag

    Mulling about the shorts

    As we know from the massive spike in short volume on 6/30 AXT has been shorted heavily. This is likely due to index related shorting, like shorting of the Russell 2000 or 3000. There are ETF's (computer trading balanced) and leveraged ETF's that are used for this. You can straight short x1 or leverage with some to even x3. The question is how do these operate. A x1 short index would just go and short all the stocks in the index and thus reflect the x1 factor. How do the x2 and more importantly x3 ones accomplish this? Well for one, they generally don't reflect x2 or x3, so it is not like they borrow money and short twice as many stocks. Some seem to use options to increase the leverage, others, I am speculating, use high beta stocks in the index to achieve the leverage. This would put AXT squarely into their sights because AXT is a high beta stock, i.e. it reacts strongly to market direction.

    Currently we are in a very bearish trend in the markets and big players are using the leveraged ETF's to take advantage of this. We saw this in the increased short position taken after earnings (suicide shorting). I assume this was related to ETF's now because no one in their right mind would double down on a stock trading at such low multiples and giving such bullish guidance.

    So I think we are faced with the reality that we are being shorted by "automatic" features in the market through ETF's. This means we likely will be heavily affected by bearish market trends. However, as you all know, this is loading the spring, that means when the bearish trend changes, we should get a lot of covering accelerating the stock price upward. As we know there has likely been a lot of accumilation in the $5's by long holders now since the stock went up in light of a large increase in the short position. We will likely see a further massive increase in the short position with the next report (comes out on 8/24 I think). I think the key here for long investors is not to get scared, so take advantage of the low price and accumulate more and you should be rewarded later this month, quarter or year. Remember, leveraged shorts are in it for the short term pop, not the long term trend.

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    • Added below 5.50, its looks to be a stout number. What I find interesting in today's trading was the amount of bids in size, a definite plus.

      Looks like the ranks are building for 3rd qt push. If we buy and hold, as Truman said: "We'll make them like it"!!!..

      Keep adding will keep the pressure on in any amount!! .. Makes for an interesting 3rd qt. IMHO-D

    • That is ture. I am more referring to that you are already fully invested, like all your money is in AXTI, but still want to play the market. If you buy X2/X3 funds, you are in margin. But instead you short X2/X3 fund the other way, you don't get charged interests.

    • I think it is more like if you think the market is going to go up short term, instead of buying on margin you simply buy the x2 short/long fund or go all out and go for the x3 short/long. So leverage without margin interest. That of course assumes these funds achieve their x2 or x3 leverage. The only drawback is that they are rebalanced daily so you don't end up being up x2 or x3 after a month or so even if you guess right.

    • This is interesting. Say you have $100K invested and you want to leverage $50K more. If you guess market long, you short short. When you guess short, you short long. This way, you don't pay margin interests to buy long or short funds. This has to be around in the market already.

    • Ok, here is some Alphabet soup on ETF's:

      Long Russell 2000 ETFs:

      IWM $11,800M x1 long
      UMM $162M x2 long

      Short Russell 2000 ETF's:

      RWM $230M x1 short
      TWM $483M x2 short

      As you can see the money is in the x1 long fund, but it is in the x2 short fun. Interestingly, the x3 fund (there is one) isn't very large. So I think the x2 short fund is likely using higher beta stock weightings and that would be to look for our turnaround on the shorting.

      Finally, I believe it is possible to short the ETF's, so some people might be shorting the actual long ETF as opposed to buying the short ETF.

    • One of the keys to the performance of AXT is the lack of tighter hands controlling the price movement. One reason why we have big swings in the stock price that attracts day traders.

      When we have a down day of 10-15%, the new investors not understanding or wanting to deal with that percentage drop, are looking move out on the next move up. This causes stagnation until the next market move weeds out weak hands, along with bringing in new investors.

      AXT has one weak spot not talk about! Not enough stock in hands of investors holding long term, creating an abnormal large float for only 32 MM shares outstanding. As this process continues, it weakens the support base of the company, and is the major cause of our unreasonable p/e. I believe that it will take another strong qt to finally resolve our problem, thus the burden of supporting the stock price will abate.

      GGG has outlined the problem with ETF's in a bad market, a fact of life if you play the short side. I don't consider that to be the bigger problem, at least not from a trading posture, and it does contribute to price movement in both directions.

      No one can predict how the financials globally will affect the
      markets in the coming months. Maybe why I don't consider anything to do with this market a sure thing. It is with this approach and mindset I invest with cautious optimism.IMHO-D

      • 1 Reply to sapcomp41
      • Good points sap. I think you need to take into account though that the short position has sizably increased the float over the last month and a half. Given the fact that we have moved up over a dollar under such dilution no doubt speaks to the inherent strength of the stock.

        It will take a bit of time, that is why myst estimate for the trading range till next Q earnings was up to $7.50. We should hit that as soon as we see a market rally. Given that August is the time for the bears to play due to the low volume, it might come as early as September.

        2011 earnings estimates right now actually are a bit of a damper, however, the stock should still trade at least at a market multiple based on those earnings sometime this year (again the $7.50-$8 range). The big question will be how wrong are the analysts with regard to 2011 (right now predicting no earnings growth) or is there a secondary factor like a much higher tax rate in 2011 than 2010 at play (likely).

        Even with all of these remaining 2010 and 2011 issues, the real value in this stock lies in the future projections. Read the companies propaganda they have been trotting out to investors all year. If you run the numbers, they are expecting to see over $150M in revenue by 2013 and with over 30% GMs even with a 30% tax rate that comes out to $1 a share in earnings.

        So we are projected by the company to go from $0.50 in 2010 to $1+ in 2013, 3 years for a double makes a 24% growth rate. If you take it off of the anemic 2011 earnigns, its a double in a bit more than 2, that gets you to a 36% growth rate. So as long as the scenerio $150+M revenue by 2013 with 30+% GMs is intact, this is a undervalued stock.

    • G, some good ideas here and much to chew on. I think the news and price action this week were actually very bullish in the mid term. One good thing about this board is that someone who is a new investor could be really mislead by the price action this week and they can at least get some explanations of why this stock behaves as it does. There is a real push and pull between the tremendous bullish record AXT is producing for over a year now, the shorts, investor CONFUSION and DISMAY, and the rampant big boy manipulation. This week was a tremendous opportunity to grab shares in the low $5's. The 13F's are showing institutions are buying some 5% of the float out of the market in Q2, the Chairman bought 11K shares, and with Mr. Pai coming on board I would not be surprised if some firms are sniffing around AXT for a buyout.

      I think the forecast of likely stock price for the next 12 months appreciation you laid out after earnings, $11 to $21 is going to happen. It won't be easy but it will happen. I for one took the opportunity to buy another slug close to the 50 day and I will do so on every panic drop. Doing so I have not one single share under water at this point even with this weeks purchase, and I can't say that about too many stocks in my portfoilio.

3.78+0.12(+3.28%)Jul 28 4:00 PMEDT