There are two primary forces that produce short side squeezes â€“ trading losses and high stock borrow financing costs. Over the past month there were nineteen domestic stocks that had short interest over $50 million with stock borrow fees increasing by 1.00% fee or more. Of those nineteen, there were twelve stocks that lost money in January.
Stocks with borrow rates that jump significantly above 5% fee may trigger automatic buy-to-covers at some hedge funds. Stocks such as Peloton (PTON), Antero Midstream (AM), Virgin Galactic (SPCE), SmileDirectClub (SDC), Luckin Coffee (LKN) and Tailored Brands (TLRD) may see some technical short covering as some hedge funds remove these short positions from their portfolios. This is especially true if the stockâ€™s spot borrow fees are surging above the borrow fees hedge funds are paying at the moment.
While a spike in stock borrow financing costs may cause some short sellers to close out their positions, the addition of recent mark-to-market losses will accelerate the process. And one of the top candidates for a double-barreled short squeeze is McDermott Intl (MDR) with stock borrow costs over 250% fee and 2020 mark-to-market losses of -$137 million. With this yearâ€™s losses wiping away nearly half of 2019â€™s mark-to-market profits there is ample reason for short sellers to start closing out their positions in order to realize some of last yearâ€™s winnings. MDR shorts are paying $579 thousand per day in stock borrow costs to keep their $80 million short position open which means that in 139 days they will wipe out their entire short position â€“ if MDR stock borrow rates donâ€™t drop significantly and quickly, we should expect a short squeeze to occur sooner rather than later.
Two other stocks with high stock borrow costs and recent mark-to-market losses are GTT Communications (GTT) and Tanger Factory Outlet Centers (SKT). GTTâ€™s stock borrow fees more than doubled to 40% and shorts are down -$22 million in mark-to-market losses in January, a quarter of 2020â€™s profits. SKTâ€™s borrow costs increased eight-fold to 23% and shorts are down $95 million in January mark-to-market losses. Both are prime candidates for a squeeze, just a notch below MDR. There are several other short stocks that were unprofitable in 2019, continue to be unprofitable in 2020 and have rising stock borrow costs. These stocks may be testing the resilience of their short sellers and their short thesis and may incur short squeezes if these stocks continue to rally.
Inseego Corp (INSG) stock borrow rates are above 60% fee and have risen by over a third in a month. Shorts are down -$50 million in mark-to-market losses in 2019-2020 and continued high stock borrow costs may squeeze out some short sellers.
Virgin Galacticâ€™s (SPCE) stock borrow cost soared 7.50% fee to 11.29% fee over the last month and spot rates are nearing 40% fee. Losses in 2019 and 2020 coupled with the recent sharp spike in stock borrowing costs are a sure sign of an upcoming short squeeze.
Luckin Coffee (LK) might not have had as huge a jump in stock borrowing rates as Virgin Galactic, but their losses are mounting at a much faster pace. Shorts were down -$462 million in 2019 and are already down -$117 million in mark-to-market losses in less than two weeks of 2020. Existing stock borrow costs are just under 10% fee, but that wonâ€™t last for long as new stock borrows are going at the 25% fee level. Shorts will be hard pressed to stick around if their daily stock borrow costs increase from $282 thousand a day to $721 thousand per day.
Medifast (MED), Innovative Industrial Properties (IIPR) and Shoe Carnival (SCVL) were unprofitable shorts in both 2019 and 2020, but with stock borrow rates under 5% fee there is still a long way to go for short squeezes to take hold in these stocks. If stock borrow rates keep climbing and mark-to-market losses continue to grow the likelihood of short squeezes in these names increases.
SmileDirectClub (SDC) is a growing short with shares shorted increasing by 6.3 million shares, +29%, over the last month. Along with this increased stock borrow demand, stock borrow costs have increased as well. Borrow rates increase from 0.66% fee to 6.79% fee over the last month and spot rates are going at around 9% fee. While the SDC short trade was profitable in 2019, shorts have given back $27 million in mark-to-market losses in 2020. If short interest continues to grow we should see stock borrow rates increase along with the chances of a short squeeze.
While short squeezes in these securities is not guaranteed, the probability of a short squeeze happening in these names is higher than most other stocks. If these short squeezes do materialize, long shareholders should see a boost in stock prices thanks to the short sellers.
Want deeper insight into the above analysis?
Contact:Â [email protected]
Managing Director Predictive Analytics, S3 Partners, LLC
For more information on S3â€™s reporting, data and analytics solutions, email us at [email protected]. Start your free trial of the BLACK App â€“ the only source of real-time short interest on the Bloomberg Terminal or Thomson Reuters Eikon. For short side data and access to our research reports go to https://shortsight.com/ .
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (â€śS3 Partnersâ€ť) to be reliable and accurate.Â Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use.Â Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decisions.