Short Sellers Have Smile Direct Club (SDC:US) in Their Sights

If a stock has a high level of short interest, it can be a red flag. Short sellers are sophisticated, high-conviction traders. If they’re shorting a stock, it’s because they have spotted a major risk. 

In this report, we are going to examine the short interest data on SmileDirectClub Inc (SDC:US). SmileDirectClub is a teledentistry company that helps people achieve straighter, whiter teeth. Headquartered in Nashville, it operates in the US, the UK, Australia, Canada, Ireland, and France. The company is listed on the Nasdaq and currently has a market cap of approximately $166 million.

High Short Interest

Since Smile Direct Club came to the market in 2019, its share price has fallen significantly. The company’s Initial Public Offering (IPO) price was $23. Today, however, the stock trades for less than 50 cents.

It seems that the short sellers expect the stock to fall further though. We say this because at present, 35.44 million SDC shares are on loan. That equates to around 29.10% of the free float.

Utilization – a measure of demand from short sellers – is currently 100%, which indicates that every share available for lending is being lent out, while the cost to borrow stock is a high 10.76%.

The short selling data clearly indicates that, within the institutional world, there’s a lot of bearish sentiment towards the stock at the moment.

A Controversial Company

It’s not hard to see why hedge funds are shorting this stock. This is a company that has been surrounded by controversy for years now.

According to Wikipedia, the American Association of Orthodontists (AAO) has filed complaints against the company with 36 state dental boards, alleging that it violates regulatory standards. Only five states have confirmed closed cases.

Meanwhile, in January, the UK’s BBC published an article in which it said that both customers and dentists it had spoken to had detailed issues with Smile Direct Club, ranging from aligners fitting poorly to permanent nerve damage and tooth loss. This was not the first time a major media outlet has investigated the company.

Looking beyond the controversy, the company is also losing a lot of money. For 2023, analysts expect the group to generate a net loss of around $130 million.

On top of this, it is suffering from the consumer slowdown. In its recent quarterly results, the company noted that challenges to consumer spending and sustained high inflation would impact demand for its services in 2023. For the quarter ended December 31, 2022, sales fell 26% year on year.

Overall, there is plenty for the short sellers to sink their teeth into here.