Plug Power Is a Short-Seller Widowmaker

NEW YORK (TheStreet) -- Alternative energy forklift supplier Plug Power (PLUG) 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.

As old shorts cover because they can't stand the pain any longer -- creating buying pressure in the process -- new short sellers conclude the stock is overpriced. They, in turn, are squeezed, continuing the buying pressure feedback loop. Rinse and repeat until you reach $230s.

Plug Power is also squeezing the daylights out of the naysaying short-sellers. Short interest exploded during the previous six months. In September 2013, three million shares were shorted and the latest numbers increased to over 22 million shares, or 20% of the trading float.

Short-sellers aren't the only ones interested in the stock.

Plug Power's intense volatility is becoming a favorite trading vehicle by active day traders starving for volatility, and in many cases action. Day traders are focused on the ticker and chart pattern. They don't care about the name of the company, much less the valuation.

Day traders are problematic for short-sellers because they can drive the price much higher than it's worth and keep it above for a long time -- long enough that the company may grow into what was once an overvaluation.

If Plug Power can continue growing, the upcoming summer's heat may be nothing compared to the heat felt by short-sellers in the face of a rising share price.

If the company missteps or loses favor among growth believers, shareholders will wish they sold the dream instead of buying it.

At the time of publication, Weinstein had no positions in securities mentioned.

Follow @RobertWeinstein

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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