Koss Stock Surges Following Tweet, Short Squeeze

Milwaukee-based Headphone maker Koss Corporation saw its stock surge as much as 131% Tuesday, believed to be a result of an on-going stock market battle between users of Reddit’s Wall Street Bets forum and short sellers.

It’s just the latest company to have benefitted from one of the more unusual stock market events in years. The first company impacted was brick-and-mortar video game retailer GameStop, which saw its stock rise more than 600% since mid-January.

The companies have become targets because of the large percentage of their outstanding shares that are sold short. A short occurs when an investor believes a company’s stock will decrease in value and sells shares they do not have with the intent to cover (buy) shares later at a lower price to complete the trade.

Companies with declining revenues, such as a brick-and-mortar video game retailer in an increasing online gaming market, are frequent targets of high-risk short sellers.

But a “short squeeze” can send the stock upward even without an underlying change in a company’s fundamentals. A surge in buying, for any reason, would drive a stock price higher. Those that have shorted the stock are forced to buy shares to cover their short, triggering even more buying. The result is a sharp increase in a stock price and big losses for short sellers.

GameStop first, and later Koss and others, became the target of users of online forum Reddit’s Wall Street Bets sub-forum. The sub-forum is popular with retail investors who have taken aim at Wall Street hedge funds. Such funds with large short positions would traditionally announce their move in an attempt to drive the price down further. Now it’s made them targets.

Forum users have posted their new positions, encouraging others to buy. Potentially compounding their buying interest are high-frequency traders that use sophisticated software systems to rapidly enter and exit positions.

On Monday, unverified Twitter user Will Meade, a self-described former Goldman Sachs employee, tweeted: “What short names will the Reddit Wall Street Bets army go after next? Here are the 3 stocks with short interest above 35% and a price below $10! $AMC $CLVS $KOSS”

Koss’s stock price closed Monday at $6, having traded much of the previously week for approximately $3.50. It opened Tuesday at $11.69, went as high as $13.87 and closed at $10. It was last higher in 2007.

On a normal day 452,406 shares of Koss stock change hands. On Tuesday 33,823,114 did.

Wall Street had spent much of the past five years valuing the company for approximately $20 million. Now it’s valued at $74.05 million.

Who’s winning and who’s losing? Long-term Koss investors suddenly find themselves with more valuable stock. But they’ll have to sell to realize a profit.

Investors betting against Koss, GameStop and others suddenly find themselves with big losses. Chief among them might be Melvin Capital Management, which received a $2.75 billion injection from hedge funds Citadel and Point72 after Melvin’s assets plunged 30% through last Friday. Citadel might have even seen that coming. The high-frequency trading firm buys pre-trade data from zero-fee retail trading platforms including Robinhood, TD Ameritrade and Charles Schwab. The data would allow the company to see a surge in retail traders about to trigger a short squeeze.

What happens next? As John Maynard Keynes famously said: “the market can remain irrational longer than you can remain solvent.”