Wall Street’s newest cult stock appears to be Richard Branson’s Virgin Galactic Holdings Inc (SPCE.N), as investors drive shares of the space tourism company to sky-high levels and short sellers dig in their heels.
Virgin Galactic jumped 23% during Wednesday’s session, adding to a rally that has seen the money-losing company surge over 400% since early December. After hours, it added another 5%.
That hypersonic ascent has made it a favorite among short sellers betting the shares will eventually fall back to earth, drawing comparisons to Tesla Inc (TSLA.O), which has also surged in recent months.
“I’m calling it Tesla Junior because it’s showing all the signs of becoming a cult stock on the long and on the short side,” said Ihor Dusaniwsky, a managing director at financial analytics firm S3 Partners.
Like other so-called cult stocks, interest in Tesla and Virgin Galactic is driven by speculation about big future payoffs rather than fundamentals.
The value of short bets against Virgin Galactic hit a record $500 million on Tuesday after the stock surged to its own all-time high, according to Dusaniwsky. The company’s rally this year has cost short sellers $345 million in paper losses.
Virgin Galactic is racing against SpaceX and Amazon.com Inc (AMZN.O) CEO Jeff Bezos’ Blue Origin to bring tourists into space, but is the only one of the three whose shares are publicly listed. That makes Virgin Galactic the only option for stock market investors who want to buy into the emerging business of space travel.
Traders on Wednesday paid the equivalent of a 34% annual interest rate to borrow Virgin Galactic shares to make new short bets, reflecting a shortage in the shares due to its popularity among short sellers. Short sellers borrow shares and then sell them, expecting to buy them back at a lower price and pocket the difference after paying the stock lender interest.
Underscoring retail investors’ interest Virgin Galactic, the company was the second most traded stock on Fidelity’s online brokerage in recent sessions, with two-thirds of clients buying shares, rather than selling. Orders for Virgin Galactic on Fidelity trailed only Tesla.
Helped by improved profitability, Tesla has seen its stock surge 120% this year, including a 7% jump on Wednesday.
Traders are shorting $18 billion worth of Tesla’s shares, dwarfing overall short bets against Virgin Galactic. Those bets are equivalent to 15% of Tesla’s float, while short bets against Virgin Galactic are equivalent to 31% of the company’s stock float, up from 7% in November.