You can now short Donald Trump, but should you?

When Donald Trump’s social media company listed on the US sharemarket last month, the former president’s net worth jumped by $US4.6 billion ($7.1 billion), rocketing him into the world’s top 500 wealthiest people and making a mockery of America’s most-prized institution, Wall Street. Not a bad day at the office for the anti-establishment candidate.

Never mind inflated real-estate valuations, at its peak, Trump Media and Technology Group, the parent company of social media platform Truth Social, was valued just shy of $US8 billion ($12.3 billion) – more than 2000 times earnings. For context, Nvidia, the world’s hottest artificial intelligence-related company, trades at 38 times earnings, while the average for S&P 500 companies is 2.8 (no, this is not fake news).

Donald Trump’s social media company listed on the US sharemarket last week.Credit: AP

You have to hand it to Trump – he’s not one to shy away from new and innovative ways to raise capital. Having tried all the “conventional” routes – NFT trading cards, Bibles, scented candles, high-top sneakers and MAGA crypto – Wall Street is now helping him fund his re-election campaign via the first political meme stock of our time.

Despite falling 50 per cent since its highest closing price, the company still has a market capitalisation of $US4.5 billion for a company that made a loss of $US58 million ($89 million) and had less than $US4 million ($6.1 million) in revenue last year.

One might think that such a lofty valuation is a “yuuuge” short, but if the pandemic meme stock era has shown us anything, it’s that some stocks can trade purely on sentiment and attention rather than fundamentals (much like Trump himself). Investing in Trump Media is less about making money than signalling that you belong to a group of like-minded people.

Wall Street is now helping Trump fund his re-election campaign via the first political meme stock of our time.

There are several reasons why going short DJT could be a recipe for covfefe.

Firstly, traders should be wary of the “low float” of shares in DJT.

Only 30 per cent of DJT’s shares are available to be publicly traded, with the majority held by Trump and other insiders. Stocks with a small float are much more volatile because there are fewer shares to buy and sell, resulting in more violent price movements. For comparison, 99 per cent of Meta shares are free-float shares available to be publicly traded.

Trump’s own 58 per cent stake is exceptionally large by Wall Street standards – more than double that of Elon Musk’s Tesla holding (20.5 per cent), more than quadruple Mark Zuckerberg’s holding in Meta (13.5 per cent) and six times Jeff Bezos’ holding in Amazon (9 per cent).

In addition, the high cost to short makes the risk return much less appealing. Trump Media is the most expensive stock to short; at its peak last week, shorters were paying costs of 565 per cent annually compared to the average of financing cost of a short position at 0.71 per cent.

Monthly implied volatility is also big league. Sitting at 160 per cent compared with an average of 44 per cent for frequently traded stocks, this measure of volatility implies average daily swings in the share price of 10 per cent, four times that of Nvidia’s 30-implied volatility and six times that of Apple.

With the cost to short so high and with such a low float, the stock is a prime candidate for a GameStop-style “short squeeze” that led to short positions suffering millions in losses.

Save Musk’s TSLA, there are very few stocks whose share prices can move depending entirely on the behaviour of a single individual.

A win for Trump in one of his (many) court cases or a stumble (literal or otherwise) from Biden on the US election campaign trail could see DJT shares whipsawing as traders place bets on the election outcome. Not to mention that any wealthy foreign actors looking to curry favour with the likely future president could easily move the share price with just a few million dollars of purchases.

As of the most recently traded price, Trump’s 78.8 million shareholding is worth about $US2.6 billion, but he is unable to realise his windfall gain until October due to a standard six-month lock-up period, ending a month before the election – although the board, which includes his son, could waive this restriction.

Should any rumour surface that Trump is planning to cash in, it would send a signal to investors he is not confident in a victory, with a stampede for the exits likely ensuing. If there is ever a time to dump Trump stock, it will be then.

There is an old saying in markets that “in the short run, the market is a voting machine but in the long run, it is a weighing machine”. In the case of Trump Media, gravity may be suspended until the real voting day.

Read more:

• ‘RAGING!’ Trump pounces as Biden gets some bad news
• Why it would be a dumb idea to ban short-selling
• ‘Numbers don’t lie’: Biden outpaces Trump in fundraising, enlists big guns for more

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.