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SmileDirectClub sell-off gives short sellers reason to grin

(Reuters) - Traders short selling SmileDirectClub had a lot to smile about on Wednesday, earning paper profits of over $115 million as the online dental company’s stock plummeted 26% following a disappointing quarterly report.

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During the previous session ahead of SmileDirectClub’s quarterly report, short bets against it climbed to a record high 40,000 shares, equivalent to 57% of the company’s float, according to S3 Partners, a financial analytics firm.

Traders borrowing SmileDirectClub shares to make new short bets on Wednesday were paying the equivalent of more than a 31% annual interest rate, up from 26% the day before, reflecting a scarcity of additional shares available to short, according the S3 Partners. Short sellers borrow shares and then sell them, hoping to buy them back at a lower price and then return them to their owners.

At least six analyst cut their price targets after the online seller of clear plastic dental aligners said it was switching gears to focus on profitability instead of growth, surprising investors counting on years of rapid expansion.

For 2020, SmileDirectClub forecast sales between $1 billion and $1.10 billion, the mid-point of which was below market estimates, and it reported a wider-than-expected fourth-quarter loss. [nL4N2AP1AF]

“While it likely has now set a more achievable bar, we view that the latest meager print and revenue/profit guide will not instill greater enthusiasm for the stock,” Credit Suisse analyst Erin Wright wrote in a note to clients.

With Wednesday’s rout, SmileDirectClub is down 64% from its September initial public offer, even as a majority of analysts recommend buying the stock.

The company reported $318.5 million in cash at the end of the fourth quarter, down from $547.6 million in the prior quarter. Given SmileDirectClub's cash burn, it may need additional capital sooner than expected, which could be an overhang on the stock, Jefferies analyst Brandon Couillard wrote in a research note. (Click here for a graphic on SmileDirectClub's cash)

(GRAPHIC: SmileDirectClub's cash depletes in December quarter - )

SmileDirectClub was one of several companies that went public last year with multibillion-dollar valuations, only to see their stock prices plummet due to skepticism they can become profitable.

Last week, Reuters reported that SmileDirectClub’s chief clinical officer, Jeffrey A. Sulitzer, was at risk of losing his California license following a two-year state dental board investigation.

Reporting by Manojna Maddipatla in Bengaluru and Noel Randewich in San Francisco; Editing by Nick Zieminski

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