How to short-sell Trump’s media empire

Donald Trump’s would-be media empire looks like a promising target for short sellers. Matthew Partridge explains how to play it.

Donald Trump
Donald Trump: still on the campaign trail
(Image credit: © ROBYN BECK/AFP via Getty Images)

Imagine a technology company run by a 75-year old with a history of multiple bankruptcies, in sectors ranging from airlines to casinos. Let’s also imagine that the individual in question is being investigated by various bodies across the US for everything from questionable tax reporting practices to opaque business dealings.

Let’s add to the picture the fact that, far from focusing his mind on the day-to-day running of his business, he will also be spending most of the next two years in an attempt to run for president (again). To top it all off, his new company is entering the market not via a traditional initial public offering (IPO), but via a special purpose acquisition company (Spac), or cash shell – typically speculative financial vehicles set up to engineer instant stockmarket listings.

Viewed in this way, it’s hard to see why anyone would invest in Digital World Acquisition Corporation (Nasdaq: DWAC). Last October DWAC agreed a deal with former president Donald Trump to merge with his social-media company Trump Media & Technology Group, which plans to launch a social-media app, Truth Social, as well as other services, including streaming television. DWAC doesn’t own any other assets, so you are effectively making a bet on Trump’s media empire being a success. And so far, enough investors have bought in to this notion to give DWAC a sizeable market cap of $3.46bn (£2.55bn).

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Trump’s fans are hard to monetise

Trump does have a massive following, both on and off social media. Before his Twitter (see below), Facebook and Instagram accounts were suspended following the riots at the Capitol on 6 January last year, he had a combined 150 million followers – a huge lead over any other contender for the Republican nomination. However, turning his celebrity into hard cash is easier said than done. An attempt to monetise his audience through his own blog was a failure, as the site struggled to find advertisers, and closed after a month. Similarly, a more recent “history tour” with Bill O’Reilly resulted in plenty of unsold seats.

Trump’s controversial legacy also makes it almost certain that his social network would find it impossible to attract anyone other than his strongest supporters and keenest fans. This would not only limit the pool of potential users, but it would also mean that it lacked the cut and thrust of debate that takes place on Twitter.

A final stumbling block is Trump’s desire to run for president again in 2024. Time spent political campaigning would leave him little room to oversee the venture. In doing so, he will also have to engage heavily with the established media, including television stations and existing social networks, which will be direct competitors to his new company.

Given all of these problems, it’s perhaps not surprising that after rising tenfold to $175, DWAC is now trading at less than half of that level, at $84. I still think this is far too high. So I would suggest shorting it at £17 per $1, covering your position if it rises above $142. This would give you a total downside risk of £986.

Trading techniques: tweeting tipsters

When Donald Trump was president, there was a big debate over whether his social-media communications – and his tweets specifically – contained useful trading signals or not. One 2020 study by Carl Ajjoub, Thomas Walker and Yunfei Zhao at the John Molson School of Business, Concordia University, found that any negative tweets Trump made about non-media companies did indeed cause their share prices to fall. Another study by Peder Gjerstada, Peter Filip Meyna, Peter, Molnár and Thomas Dowling Næss of the Norwegian University of Science and Technology found that his tweets, particularly those on trade, also generally pushed the S&P 500 lower, and boosted gold.

Trump was indefinitely banned from Twitter in the wake of last year’s riots at Capitol Hill. But there are plenty of other controversial financial tweeters. By far the most prominent is Tesla’s founder Elon Musk. Musk has had a few brushes with the US financial regulator, the Securities and Exchange Commission, over his habit of making announcements about Tesla over the social network, which ended up with him being fined $20m for tweeting in 2018 that he was thinking of taking Tesla private at $420 a share.

Musk doesn’t just talk about Tesla. A tweet about GameStop last year was credited with sending its share price up to nearly $500, while his tweets on cryptocurrencies, including bitcoin and dogecoin, have also moved prices. Still, the long-term impact of his “views” is debatable: both bitcoin and GameStop are now well off their post-Musk peaks, while Tesla has fallen by more than 23% this year. In short, even if Twitter gives you the occasional idea, always do your own research.

How my tips have fared

The past two weeks have seen four of my five long tips fall in value. Asset manager Rathbones Group declined from 1,866p to 1,858p, supermarket J Sainsbury dipped from 285p to 283p, while telecoms firm Airtel Africa fell from 149p to 140p (see page 32). Transport firm National Express also fell from 264p to 254p. However, construction firm Morgan Sindall rose from 2,150p to 2,238p. Overall, my five long tips are making a profit of £2,497, down on two weeks ago, even after accounting for closing the DR Horton tip.

My short tips have been mixed. Two have moved in my favour, but the other two gained in value. Cinema chain AMC fell from $16.64 to $14.44 and Chinese real-estate broker KE Holdings fell from $21.74 to $19.11. However, remote medicine firm Teladoc increased from $73.18 to $75.28 and online sales firm Hubspot increased from $455 to $483. Overall, the gains from AMC and KE Holdings outweighed the losses from Teladoc and Hubspot, so my short tips are now making a total profit of £2,775 compared with £2,597 a fortnight ago.

My nine open tips are showing a combined profit of £5,272. I now have five long tips (Rathbones Group, J Sainsbury, Airtel Africa, National Express and Morgan Sindall) and five short tips (AMC, KE Holdings, Teladoc, Hubspot and Digital World Acquisition Corp), so my portfolio is now balanced.

However, I’m going to lock in some profits by suggesting you raise your stop loss on Morgan Sindall to 1,900p (from 1,850p); on Rathbones Group to 1,550p (from 1,500p); on J Sainsbury to 150p (from 144p); on Airtel Africa to 100p (from 95p) and National Express to 130p (from 123p). I’d also cut the price at which you cover the AMC short to $35 (from $40).

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri