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 twenty-one domestic stocks with short interest over $50 million and stock borrow fees increasing by 1.00% fee or more. Of those twenty-one, there were fourteen stocks that had mark-to-market losses 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 Change Healthcare Inc (CHNG), Noble Midstream Partners (NBLX), Match Group (MTCH) and Beyond Meat (BYND) 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. New losses which are either adding on to mark-to-market losses incurred in 2019 or wiping out 2019 mark-to-market profits may be a trigger, along with high stock borrow financing rates, to trim or close out short positions.
SmileDirectClub (SDC) is a prime candidate for a short squeeze as 2020 mark-to-market losses have more than wiped out 2019 gains and put short sellers solidly in the red. Coupled with the losses, stock borrow rates have increased from just over 3.00% fee in late December to 57.54% fee today. Spot fees of 82.85% indicate that SDC stock borrows are going to get even more expensive in the very near term. We have seen steady short selling since its September IPO, but we will probably start to see short covering into this rally that started in early January.
Tanger Factory Outlet Centers (SKT) shorts have seen their stock borrow costs increase ten-fold to 47.29% fee over the last month, but their losses 2019 mark-to-mark losses have been fairly minimal, -$21 million, as compared to the $183 million in mark-to-market profits they earnedÂ in 2019. Although a stock borrow rate based squeeze in not out of the question, it will probably take more significant price moves to the upside, instead of the present stock price plateau, to start chasing shorts out of their positions in size.
GTT Communications (GTT) shorts face the same situation as SKT shorts, significantly higher stock borrow rates, 2020 mark-to-market losses eating into 2019 profits and a stock price that is treading water around the $11-$13 range. We have seen some short covering in December 2019, but weâ€™ll need a stock price rally to begin GTTâ€™s short squeeze.
Inmode (INMD) shorts have been growing their exposure slowly since September 2019, increasing shares shorted by almost 400 thousand shares in just over four months. Shorts were down -$39 million in mark-to-market losses in 2019 and are down another -$16 million, or down -15%, in 2020. The slow growth in shares shorted implies a less than hearty conviction in the trade and with stock borrow rates at 78.04% fee, the stock borrow Alpha erosion may squeeze the less hearty shorts out of their positions.
Peloton (PTON) is another strong short squeeze candidate with stock borrow rates tripling to 33.29% fee and post-IPO mark-to-market losses topping -$255 million. With Short Interest as a % of Float at 85% there is not much stock left to borrow on the street. Short sellers may not have to decide whether they want to stay in their trades, recalls hitting the street may make their decisions for them. We have seen more than a million shares of recalls sent out to brokers over the last few days and these brokers will be forcing some of their clients out of their positions or allow them to stay at more exorbitant rates. We should see increased short activity ahead of PTONâ€™s February 5th earnings report which should put even more pressure on stock borrow rates. Expect rates to top 50% fee before short sellers have time to finish another lap and the chances of a significant short squeeze in the name to increase daily.
Virgin Galactic Holdings (SPCE) shorts may have felt the G-force of their stock borrow rates going from a palatable 2.50% fee to 19.54% fee in just one month. Shorts were down -$20 million in mark-to-market losses in 2019 and have endured almost four times as many losses in 2020. Stock borrow rates continue to surge skyward, we should see levels in the 30% range by next week, if losses continue to accumulate, we should see a Tang-like SPCE short squeeze soon.
Match Group (MTCH) and Beyond Meat (BYND) shorts are both in similar situations. Stock borrow rates are have risen about 2.50% fee over the last month, but rates are still not oppressive at 6.04% and 4.29% fee, respectively. Both shorts are following up their 2019 mark-to-market losses with more losses in 2020. MTCH shorts were down -$761 million in 2019 mark-to-market losses followed by -$77 million of losses in 2020 . MTCH short selling has been light in 2019, if its stock price reverts to its December 2019 upward trajectory, shorts should begin to get squeezed out of their positions.
BYND shorts have been taking head shots in both 2019 and 2020 and are down -$949 million in mark-to-market losses since its May IPO. BYND may turn out to be another Tesla teflon-like short with short sellers will just putting a couple of plant-based steaks on their black eyes and holding onto their convictions. Or if stock borrow fees continue to climb because stock loan availability is disappearing due to Short Interest as a % of Float already as high as 46% we may seem some shorts passing on dessert and exiting their positions.
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.
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Managing Director Predictive Analytics, S3 Partners, LLC
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