ARM: Short Squeeze

Our deep-dive focuses on the fundamentals

ARM’s stock is up 110% YTD. We wrote about ARM a few months ago and reckoned that intrinsic value for ARM is a bit lower than the IPO price. In hindsight, it was perhaps a limitation of our imagination. We should have added the following in our analysis:

“Masa son understands capital markets. ARM is a semiconductor stock in the middle of an AI revolution with only 5% of shares trading. With even a small percentage of shares short, ARM is prone to short squeezes”

Is this fundamental analysis, technical analysis or voodoo analysis? I don’t know….what I do know is that if you were inclined to buy ARM then this fact would have perhaps pushed you to pull the trigger.

I recently watched 'Dumb Money,' an excellent film that delves into the GameStop short squeeze saga. In one particular scene, Gabe Plotkin provides reassurance to his wife regarding his short thesis. He draws a parallel to the Pigly Wigly Corp, where the founder Clarence Saunders and a cohort of retail investors similarly confronted Wall Street and, ultimately, lost. Plotkin asserts that virtually everyone in the finance realm is familiar with the Pigly Wigly short squeeze tale.

Surprisingly, despite over 15 years in the industry, I was unaware of this story! I had to conduct some research, and I found it utterly captivating.

Clerence Saunders opened the first Piggly Wiggly, a self-service retail store, in Memphis, Tennessee, in 1916. At the time, traditional grocery stores relied on clerks to retrieve items for customers, who would then bring them to the checkout counter. However, Saunders introduced the concept of self-service, where customers could browse the aisles and select their own goods, marking them with price tags as they went. This not only streamlined the shopping experience but also reduced labor costs for the store.

In 1922 a significant portion of Pigly Wigly's shares were being shorted by institutional investors who believed the company to be overvalued.

Saunders did not like this and resolved to "break Wall Street" by purchasing Piggly Wiggly stock to raise its price. He borrowed $10 million (equivalent to about $150 million today) and embarked on a buying frenzy. Within a week, he acquired over 100,000 of the 200,000 outstanding shares of Piggly Wiggly. By March 1923, Saunders controlled more than 198,000 shares, or 99 percent of all Piggly Wiggly stock.

His shares were valued far higher than the $10 million he borrowed. However, selling them on the exchange risked lowering the stock price, weakening his position against the short sellers. His solution? He opted to sell some shares directly to the public at a fixed price, bypassing the stock exchange entirely.

On March 20, 1923, Saunders executed his short squeeze strategy. While amassing Piggly Wiggly stock, he also permitted his brokers to lend these shares to short sellers. By exercising his right to recall lent shares, Saunders demanded the return of 42,000 shares that morning. Short sellers, given 24 hours to comply per New York Stock Exchange regulations, scrambled to cover their positions. As a result, Piggly Wiggly's price surged from $75 to $124 in just a few hours of trading.

Hours after Piggly Wiggly hit its peak price, the New York Stock Exchange abruptly halted all trading of the stock indefinitely. Even before the suspension was officially announced, rumors of it caused the price to plummet to $82. After some twists and turns, ultimately, the short sellers were able to hold on and Saunder’s declared bankruptcy.

I thought this was an odd case study for Plotkin to derive conviction for the Gamestop short squeeze. Was ‘rules being changed’ part of the short thesis? Well - if you watch the movie the rules were changed but what he did not factor into his analysis was social media!

In ARM’s case, we expect there will be a follow-on offering from Masa Son and this should pressure the stock price. Like everything in the markets, there are excesses on the upside and the downside.

Daye wrote a detailed deep-dive on ARM that goes into history, business quality as well as valuation. Given the recent interest in ARM, we have opened up significant parts of the deep-dive for our subscribers.

Enjoy!