Short sellers get 'annihilated' after Wayfair surges more than 20% on better-than-expected results

  • Wayfair shares surged Tuesday after the online furniture retailer reported better than expected first quarter earnings.
  • The heavily-shorted firm is one of the market's best performers this year with its shares up nearly 80 percent.
Niraj Shah, Wayfair CEO
Ashlee Espinal | CNBC
Niraj Shah, Wayfair CEO

Wayfair shares spiked Tuesday after the online furniture retailer reported better-than-expected first-quarter results.

The stock closed up more than 20 percent on Tuesday. Wayfair is one of the market's best performers this year with its shares up 76 percent year to date versus the S&P 500's 7 percent return.

The company's short interest is 14.1 million shares, or 39 percent of its float, according to FactSet. Wayfair short sellers lost roughly $160 million by midday assuming the investors didn't exit their positions.

"This is what happens when short sellers gang up on one stock. They get completely annihilated when they are wrong," Active Alts' Brad Lamensdorf, portfolio manager of the SQZZ ETF, said in a phone interview.

One short seller, however, is recommending that investors should add to their bearish Wayfair positions on the rally.

"While some $W shorts cover, Citron loves the opportunity to short more here," Citron Research wrote on its Twitter feed. "Citron believes the stock should trade right back to $45."

Wall street analysts cheered the report, further boosting the stock. Wayfair reported it had a first-quarter loss of 48 cents per share versus the Wall Street consensus for a loss of 57 cents per share. The company also posted $961 million in sales for the quarter compared with the $935 million Street estimate.

"Q1 results and Q2 guidance gave Wayfair bulls plenty to cheer about," Piper Jaffray analyst Peter Keith wrote in a note to clients Tuesday. "All in, the set up going forward for W shares looks attractive as revenue growth has stopped decelerating. … We can now see a path to full year EBITDA profitability in the U.S. for 2017."

Disclosure: Active Alts does not have a position in Wayfair.