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TheStreet Open House

Plug Power Is a Short-Seller Widowmaker

Stocks in this article: PLUG CMI AVA TSLA

NEW YORK (TheStreet) -- Alternative energy forklift supplier Plug Power (PLUG - Get Report) raised the stakes for obsessed short sellers after announcing its intention to acquire ReliOn Inc., a developer of hydrogen fuel cell stacks. The press release sent shares higher in pre-market trading on Thursday and they are now trading around $7.50, up over 385% for the year to date.

According to the press release, the acquisition furthers the company's in-house technology development, an area considered weak and highlighted by short-sellers. ReliOn is a privately held company partly owned by Cummins (CMI) and Avista (AVA). As a result, it's difficult to discern ReliOn's financial performance.

Plug Power said it expects $1 million in the income statement expenses in 2014, and ReliOn will become accretive to earnings as soon as 2015. Short-sellers are quick to point out Plug Power's past predictions often fall short.

Short-selling is when an investor borrows stock they do not own and sells it. They then buy shares to return the shares they borrowed. Short-sellers profit if shares decline in value between the sale and purchase. They're considered the "smart money" on Wall Street because the practice is usually performed by sophisticated and well-funded investors.

Short interest is critical to track because when a lot of smart money believes a stock is overvalued relative to the underlying company, they usually call it correctly. But not always. When their bets are wrong they can get caught in what's known as a short squeeze. As a stock price rises and gains attraction, shorts lose ever increasing amounts of money.

Often, shorts become their own worst enemy, driving a stock price higher because they are forced to buy because they reached their maximum loss. A notable example is Tesla Motors (TSLA). Tesla and Plug Power may not have reached operational profitability yet (as short-sellers are quick to point out), but don't tell that to shareholders getting rich.

Before Tesla rocketed above $40, over 20 million shares were shorted. As of the last report in March, over 28 million shares remain short even with the stock trading above $230. It's doubtful many of last year's shorts remain in their position at the same cost basis.

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