Short sellers made a profit by betting against stocks in 2022, only the second year during the past five years.
Choosing to bet against stocks such as electric vehicle manufacturer Tesla (TSLA), internet giant Amazon (AMZN) and tech behemoth Meta Platforms (META) turned out to be the top three money makers for short sellers whose returns beat the S&P 500.
U.S. equity and ADR short sellers generated a profit last year as shorts were up $300 billion in year-to-date mark-to-market profits on an average short interest of $973 billion, an increase of 30.83% for 2022, according to Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, a New York-based financial data company in a January report.
Shorts Outperform S&P 500
The returns of the shorts managed to outperform the long returns of the larger cap S&P 500 and broader Russell 3000 but underperformed the more tech-based Nasdaq slightly during a volatile year that began with Russia's invasion of Ukraine, a rebound in crude oil prices and an economy that faced high inflation rates and rising interest rates.
The performance of short sellers during the past five years beat the returns of the overall market.
"Short sellers have usually outperformed the market over the last five years, earning a higher positive return in down years while not posting as large a negative return on up years," he said. "Over the last five years, short-side negative returns were less than half of the expected negative returns relative to the S&P 500, Nasdaq, and Russell 3000 positive returns."
Institutional and retail traders who banked on communication services stocks declining earned the most profit, according to S3 Partners.
Shorts in the communications services and consumer discretionary sectors yielded over 50% positive returns on average while the average energy sector short was down 28% for the year.
Mega cap tech stocks were some of the most profitable shorts while Elon Musk’s $44 billion acquisition of Twitter "clobbered shorts with a 27% mark-to-market loss," Dusaniwsky said.
"Picking the correct sector to short was only half the battle - within each sector we saw a wide range of short-side winners and losers," he said.
Shorts who chose the consumer discretionary sector were up slightly more than 50% in 2022, since Tesla was the most profitable and largest average U.S. short in 2022.
Beyond Meat (BYND) Inc was the most profitable short in the consumer staples sector, while consumer basics such as like General Mills (GIS), Campbell Soup (CPB), Coca-Cola (KO), Kellogg (K), Phillip Morris (PM), and Hershey (HSY) showed "retail strength in an otherwise weak 2022," according to the report.
Betting against oil companies in the energy sector resulted in large losses - it was the "short sellers Achilles heel, down 28% in 2022 with $9 out of every $10 shorted being an unprofitable trade," Dusaniwsky said.
Insurance companies turned out to be the sub-industry to short in the financials sector since it made up eight out the top 10 least profitable trades.
Instead, shorting brokerage, banking and cloud-based financial stocks wound up be the most profitable shorts in the sector.
Traders who chose the smaller cap securities in the health care sector made a profit compared to ones who focused on the larger cap biotech and pharma stocks.
Short-side winners beat the short-side losers by 2 to 1 in the industrials sector.
Traders who picked stocks in the information technolgy sector found themselves in a situation similar to "fishing in a barrel with $9 out of every $10 shorted being a profitable trade and 70% of all securities in the sector having down years," according to S3 Partneers.
The winning trade in the materials sector was shorting chemical stocks while iron and steel stock that were shorted resulted in being the losing trade.
The volume in short selling in SPACs fell significantly in 2022 with the focus being on one one stock, Digital World Acquisition Corp (DWAC) , which had an average short interest over $100 million over the year as the blank check company seeks to merge with Donald Trump's fledgling media group.
Beneficiairies of rising interest rates were stocks in the real estate sector, resulting in "a forgiving trade almost two-thirds of shorted stocks being a profitable but winning trades earning a +2.8% return while losing trades only down 7.6%," he said.
Shorting the utilities sector was more challenging as 55% of every dollar shorted was profitable and 45% was not profitable, Dusaniwsky said
The top 10 stocks shorted in 2022 that were the most profitable were Tesla, Amazon, Meta Platforms, Apple (AAPL), Carvana (CVNA), Block (SQ), Microsoft (MSFT), Nvidia (NVDA), Advanced Micro Devices (AMD) and Sea (SE).
The top three stocks that made the least profit were Exxon Mobil (XOM), Occidental Petroleum (OXY) and Chevron (CVX).
