The 'Pokemon' short: Why Nintendo's surge may not last

In the days following the launch of "Pokemon Go," shares of the company behind the incredibly popular mobile game were on a tear.

Yet just as Nintendo (Tokyo Stock Exchange: 7974.T-JP) stock hit highs not seen in six years, so did interest in the stock's short positions, or investors making bets that the price will fall. The stock dropped slightly from its high this week but is still way up from two weeks ago.

While the stock price has more than doubled this month, short interest in the gaming company's shares has tripled in the last 10 days. That suggests that "Pokemania" has attracted plenty of doubters when it comes to the mobile game sustaining Nintendo's current stock level.

In fact, since the launch of the game, Nintendo's U.S.-traded ADR (Tokyo Stock Exchange: 7974.T-JP) more than doubled in market value, soaring as high as $18 billion just in a span of two weeks.

At the beginning of the month, Nintendo's portion of shares on loan was less than 1 percent — meaning that less than 1 percent of the total shares traded were loaned out for shorting by prime brokers. But following the stock's meteoric rise after the launch, that number has more than tripled to over 2.5 percent, according to data compiled by IHS Markit.

Both the Japanese and U.S. listings are popular with short sellers, said Simon Colvin, a research analyst at Markit. "The majority of short positions by value are found in the Japanese listing which sees $840 million of loans out to short sellers against $42 million in the ADR listing," he wrote in a blog post.

"Shares on loan" is a measure of the total number of shares of a security that has been loaned out to short sellers, expressed as a percent of total tradable shares.

Investors track stock-loan levels to gain a sense of how popular the stock is with short sellers and where the price might be headed. They also provide some insight into whether any positive news might force short traders to cover their positions, pushing stocks higher.

Short sellers have traditionally lurked under gaming stocks in the past because mobile games are seen as having a relatively short shelf life and in constant need of innovation.

But the recent surge in short interest in Nintendo stock runs contrary to that seen in the rest of the video-game sector and comes on the heels of short covering in other gaming stocks such as Gamestop (NYSE: GME), Electronic Arts (NASDAQ: EA) NetEase ADR (NASDAQ: NTES) and Mattel (NASDAQ: MAT), according to a report by Markit.

The constituents of the PureFunds Video Tech (NYSE Arca: GAMR) exchange-traded fund, which is a proxy for the sector, have seen investors cover their shorts as the average percent of shares outstanding on loan has declined almost 0.20 percentage points for the ETF during the same period Nintendo's has surged by more than 1.7 percentage points.

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