Square Inc (SQ US) is the second largest short in the Data Processing & Outsourced Services Sector and has been a popular short this year. Shares shorted have increased by +2.71 million shares, +$217 million, in 2020 even as its stock price rose by 28.21%. But that short activity occurred in January when shares shorted increased by +3.46 million, +$277 million. In February, shares shorted decreased by -752 thousand shares, -$60 million. Short sellers have been actively trimming their short exposure since February 5th, covering -2.50 million shares, -$201 million as SQ’s stock price rose 2.50%.
Square shares shorted is now 32.96 million shares worth $2.64 billion or 9.77% of its float.
Square Inc shorts have had the worst performance in the sector in 2020, they are down -$561 million, -23.62%, in mark-to-market losses in 2020 and down -$189 million in mark-to-market losses in February as its stock price continued its five month rally. 2020’s losses extend losses incurred in 2019 when shorts were down -$194 million in mark-to-market losses, -9.33%.
There were not many winners on the short side of the Data Processing & Outsourced Services Sector with the entire sector down -$1.45 billion, -6.02%, in 2020. Only a third of the shorts in the sector were profitable and none made over $100 million in profits this year.
Square Inc shorts were selling into 2020’s rally looking for a pullback from its quick rise from $62/share to $80/share. But as the rally continued, shorts began trimming their positions, realizing their losses and looking for greener pastures elsewhere.
Square Inc shares shorted have declined ahead of its 4th quarter earnings report on February 26th. Shorts may be looking for positive results as the firm concentrates its efforts on its two main business lines, point-of sale systems and person-to-person payments. Strong results may create a short squeeze and accelerate short covering in the stock as more short sellers pare down their exposure in the face of mounting mark-to-market losses. These buy-to-covers will amplify the effect of strong long buying on its stock price and its 2020 rally will continue at its steep trajectory.
If quarterly results just meet expectations, there will probably not be an influx of long buying, but the trend of short covering may still continue as shorts reduce their exposure to levels closer to the $2.1 billion of average short interest we saw in 2019 and $1.9 billion of average short interest in 2018.
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Contact: Ihor.Dusaniwsky@S3Partners.com
Managing Director Predictive Analytics, S3 Partners, LLC
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