We follow almost 9,500 non-ETF domestic equities on a daily basis with $917 billion worth of short interest. These stocks have an average fee to short sellers of 0.72% fee and an average 7.31% Short Interest % of Float. Over the last month and a half, we’ve seen the disappearance of the “super-hot” stock borrows, stocks with fees over 100% fee like McDermott Intl and Clovis Oncology in January, and more stocks in the “hot” range like Inmode, FuelCell Energy, Peloton and a bevy of cannabis stocks.
Stock Borrow Fee: The annualized stock borrow fee charged by brokers to short sellers. Short sellers pay a fee to borrow stock to cover the settlement of their short sales. Stock loan is a supply\demand market; if supply gets tight or demand spikes borrow fees are bound to go up.
The U.S. traded stocks with the most expensive stock borrow fees (min short int $50 mm):
High stock borrow fees have a negative impact to Alpha, slowly and insidiously eating away at accumulated profits. We have two stocks with over $1 million daily stock borrow costs/day and short sellers in both Peloton (PTON) and Canopy Growth (CGC) seem as bothered by the high fees as sharks are by the remora hitching a ride on them for food and safety. PTON shorts have shorted 2.6 million new shares over the month while CGC shorts added 1.4 million new shorts. While shorts have made almost +$10 million in mark-to-market profits in 2020, the -$40 million in stock loan fees they’ve incurred have turned their position into a net loser of -$30 million. Stock borrow costs turned a +0.96% winner into a -2.95% loser. CGC shorts fared slightly better, making +$71 million in mark-to-market profits, but “only” paying away -$58 in stock borrow costs, leaving them with +$12.7 million in net profits, a +1.24% return.
Daily Financing Costs: The daily cost to borrow stock is the $ Notional of the short position * Stock Borrow Fee / 360 days. The amount of total daily financing costs depends on the size of the short, stock price and stock borrow fee.
The U.S. traded stocks with the largest daily stock borrow expense (minimum short interest $50 mm):
Besides their cost, some shorts are very crowded and difficult to get into. Most of these stocks are long-time shorts, but due to their high SI % of Float there is a very small chance that there will any significant amount of additional short selling in these stocks due to lack of stock loan supply. Any compelling downward price movement in these stocks will be due to long selling and not short selling. All these stocks still have stock borrows available, but if short activity continues, we should see rates increase at a much quicker pace and recalls started hitting the street.
There are several stocks with high Short Interest % Float, but Tilray (TLRY) and Gamestop (GME) lead the pack with levels above 100%. Tilray stock borrow rates are climbing fast, we are seeing rates nearing 90% fee today and stock borrow availability is getting thin. There will be limited additional short selling in the stock due to the inability of getting short locates in size. Gamestop stock borrow rates are still surprising low compared to its SI % Float. There is still stock available to borrow, but we are nearing a tipping point when rates start to climb quickly and stock borrow supply starts to dwindle. Another stock with high SI % Float is Peloton (PTON), rates are now well above 65% on new stock borrows and stock borrow supply is beginning to show the strain of continued short selling demand. If shorts continue to pound the stock, the reduced borrow supply will force rates to trend even higher.
Short Interest as a % of Float: The total number of shares shorted divided by the company’s float. SI % of Float usually tops out at the 40% to 60% range due to lendability constraints.
The U.S. traded stocks with the highest Short Interest as a % of Float (minimum short interest $50 mm):
Short sellers must take into consideration the cost of the underlying stock borrow as well as the Short Interest as a % of Float when making their short investment decisions. High stock borrow costs can eat into expected Alpha making an attractive trade fall below investment thresholds. Or an unexpected increase in stock borrow rates can turn a home-run trade into a run of the mill single.
High daily financing costs hit a short seller’s bottom line directly, if a stock’s price plateaus the trader will be seeing red financing numbers that are not being offset by daily mark-to-market profits. If these financing costs are not accounted for properly on a daily basis, what may look like a profitable trade may in actuality be a loser.
When sorting through short side candidates a quick look at SI % Float can determine whether a potential investment is early or late to the trade. If SI % Float is already high, the trade is already relatively crowded there may a sudden and dangerous stampede for the exits if the stock rallies. A low SI % Float may indicate that the investor is early to the game and is able to covertly build a position and sample most of the early Alpha exclusively.
Using our Black App or our Blacklight SaaS platform, a trader can see up-to-date short interest, stock borrow fees\cost and SI % Float, to get a leg up on the competition and get in or out of trades before the herd.
Want deeper insight into the above analysis?
Contact: Ihor.Dusaniwsky@S3Partners.com
Managing Director Predictive Analytics, S3 Partners, LLC
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