There are two primary forces that produce short side squeezes – trading losses and high stock borrow financing costs. Over the past month there were twelve domestic stocks with short interest over $50 million and stock borrow fees increasing by 4.00% fee or more. Of those twelve, there were eight stocks that had mark-to-market losses in 2020.
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.
Aurora Cannabis (ACB) would be a prime candidate for a stock loan based short squeeze with stock borrow rates jumping by over 35% fee over the last 30 days except for the fact short sellers continue to make money in the short trade even after paying exorbitant stock borrow fees. Shorts were up $371 million in net-of -financing profits in 2019 and are following up that +54% return with a +24% return in January\February. Shorts have paid away -$175 million of stock borrow costs in 2019 and another -$22 million in 2020, but have offset those costs with $652 million in mark-to-market profits. As long as Aurora Cannabis’ stock price continues its downward trend, its high stock borrow cost will not be causing a squeeze in the name. In fact, we’ve seen an additional 3.4 million shares of ACB shorted over the last week.
Revolve Group (RVLV) stock borrow fees doubled to 63.08% over the last few days and the increased costs are adding to mark-to-market losses in 2020. Shorts were up $114 million in net-of-financing profits in 2019, but have given back -$22 million in 2020, -$10 in stock borrow costs and -$12 in mark-to-market losses. At the moment, shorts are still sitting on a cushion of 2019 profits and a minor giveback in 2020 will not force a short squeeze in the stock, but if losses continue to mount we can see shorts cutting bait and realizing profits before they all disappear.
XBiotech Inc (XBIT) shorts were down -$44 million in net-of-financing losses in 2019 so a significant increase in stock borrow rates may have a bigger effect on them than shorts that were winners in 2019. But that effect is mitigated with a +$23 million mark-to-market profit so far in the first quarter. We have seen some short covering over the last week, -348 thousand shares, but that may just be a shakeout of short sellers who have no use for short positions with rates over 10% fee. We won’t call for a short squeeze until 2020 profits turn into losses.
Peloton Interactive (PTON) was highlighted as a short squeeze candidate in our previous report and nothing has changed to change our minds. Shorts were down -$144 million in net-of-financing losses in 2019 and were beginning to eat into those red numbers with PTON’s stock price down over -4% for the year. Unfortunately, PTON shorts also incurred -$47 million in stock borrow costs for the year, turning a trading profit in a net loss of -$13 million. We’ve seen over 1.1 million shares covered over the last week, stock borrow recalls continue to hit the street, and Short Interest % of Float at 87% … PTON is a prime short squeeze candidate.
GTT Communications (GTT) looks like it’s in the beginning of a short squeeze. Stock borrow fees have increased by 14.54% fee over the last 30 days, and the 72.58% stock borrow fee is adding -$13.5 million in stock borrow costs to -$20 million of mark-to-market losses in 2020. The -$34 million in 2020 losses has already reduced 2019’s +$90 million profit by over a third. We’ve seen -436 thousand of short covering over the last month (-277 thousand in just the last week) and we should see more short covering into this year’s +15% rally.
AMC Entertainment’s (AMC) squeezability is much like GTT’s. Stock borrow rates increased by 12% fee to 46.6% fee and 2020 losses are eating into 2019 profits. Shorts have covered over 1 million shares over the last month and should continue to cover as long as AMC continues to rally from its late January lows.
Tilray Inc (TLRY) is the second of four cannabis stocks in our list and should be a strong squeeze candidate except for the fact that shorts are not reducing their exposure to the stock. Tilray shorts were up +$181 million in net-of-financing profits in 2019 and although they are up slightly, +$7 million, in mark-to-market profits in 2020, -$10 million in stock borrow costs have turned 2020 into a net loser. Stock borrow cost have jumped 10% fee to 50% fee with Short Interest % of Float at over 100%. This is a stock ready to be squeezed if its stock price heads north and recalls continue to accumulate.
Canopy Growth (CGC) is another cannabis stock poised for a short squeeze. The +$115 million of profits earned in 2019 have been virtually wiped out with this year’s -$112 worth of losses. Shorts were down -$47 million in mark-to-market losses and incurred -$66 million in stock borrow costs. Stock borrow expenses will continue to grow at an even greater pace with rates increasing by almost 9% fee over the last month to 53% fee. CGC is on the verge of a short squeeze, except no one told their short sellers, with shares shorted increasing by 644 thousand over the last month and +162 thousand over the last week. If CGC’s stock price continues its moderate 2020 growth we should see a short squeeze sooner rather than later.
Although Change Healthcare’s (CHNG) stock borrow rate popped +8.79% fee to 11.33% fee it is far from a short squeeze candidate. Shorts were down -$26 million in 2019 and are starting to recoup their losses despite their high stock borrow costs. Shorts have increased their exposure by 5.0 million shares over the last month and 2.7 million shares over the last week.
Virgin Galactic (SPCE) is a prime example of a short squeeze candidate. Moderate 2019 losses of -$20 million followed up with huge losses in 2020, -$257 million; stock borrow rates starting to climb (+6.79% fee to 11.83% fee) and stock loan availability getting very thin. Instead of a short squeeze we are seeing increased short side activity, with +3.08 million shares shorted over the last month and 857 thousand shares shorted over the last week. Shorts may have a strong conviction in this name, but if losses continue to accumulate we can have a significant short squeeze in the this stock. Once we see shorts covering there may be a race for the exits as the buys-to-cover become a second stage to SPCE’s rally.
The short squeeze in SmileDirectClub (SDC) may be starting with share shorted decreasing by -1.1 million shares over the last month and -239 thousand shares over the last week. Stock borrow rates have increased by almost 5% fee to 26.58% fee over the last month and shorts are down -$161 million in net-of-financing losses in 2020. The +$78 million of profits earned in 2019 are long forgotten and with the stock up almost 50% this year we should see a good portion of the 37 million of shares shorted start to shrink.
Cronos Group (CRON) is the fourth of our cannabis stocks with a large increase in stock borrow fees, but its price weakness is keeping shorts in their trades. Shorts were up +$131 million in net-of-financing profits in 2019 and are up another +$11 million in 2020 despite giving away a third of their profits to finance their stock borrows. Cronos is not poised for a short squeeze unless stock borrow rates rise significantly higher and its stock price reverses course and gets into the black.
Increases in stock borrow fees do not always result in short squeezes, especially if the underlying stock is performing poorly. But if the added financing cost has a very negative impact on expected Alpha short sellers may decide that there are greener pastures elsewhere and close out their positions.
Want deeper insight into the above analysis?
Contact: Ihor.Dusaniwsky@S3Partners.com
Managing Director Predictive Analytics, S3 Partners, LLC
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