S3 Analytics: July 31st – August 4th Best and Worst U.S./Canadian Short Performers

Every week, S3 tracks short sellers’ equity positions in the US, revealing the trades that delivered positive results or missed the mark.  After tracking $887 billion worth of short positions, the following is a list of this week’s top five best and worst performing shorts.

AAOI US           After closing at an all-time high of $99.61 on Tuesday, the optical semiconductor company plunged 35.1% after an especially weak revenue forecast, netting short investors $290 million. Despite 2Q revenue beating analyst estimates, Applied Optoelectronic’s new forecast of Q3 revenue was $107-115 million, much lower than the $123 million that analysts had anticipated. This was due to lackluster sales of their 40-gbps optical transceivers. Consequently, Northland Capital downgraded the stock to underperform while Piper Jaffray cut its price target to $87 from $90.

AMZN US          Amazon dipped 3.2% last week following a 2Q earnings report that missed analyst estimates. Quarterly revenues of $38 billion were up 25% from a year earlier, but profits slumped 77% as the e-commerce behemoth has been revving up spending to expand into new product lines. The company also said they could lose up to $400 million in operating profit in the current quarter, further confirming that they are in a spending cycle. This caused many investors to sell their shares in order to lock in profits while the price was still above the $1,000 mark, which drove prices down even further.

RH US      Home furniture retailer Restoration Hardware declined 18.5% last week. The company recently issued a recall of 9,400 of its products that posed possible injury and laceration hazards due to detached metal trimming.  So far, RH is up 13% this year, faring much better than some of the other brick and mortar retailers that have fallen victim to Amazon’s dominance. However, much of this rise is because of stock buybacks. So far this year, RH has bought back about 50% of its shares, reducing its float to 18.6 million shares. With 12.5 million shares already shorted the reduced stock borrow liquidity will eventually drive borrow rates even higher than today’s 44% fee. Short sellers are down $569 million year-to-date even with this week’s $150 million in mark to market profits. RH’s increased debt load, which is due to financing its stock buybacks and expanding its brick and mortar footprint, may be too attractive to pass up and shorts are willing to incur expensive short financing rates in anticipation of RH’s future cash flows not being large enough to cover its crushing interest payments. RH’s stock buyback defense against short selling may in fact empower short sellers to hold onto their positions.

ABC US             Pharmaceutical giant Americsourcebergen tumbled 14% last week after another pharmaceutical heavyweight, Teva Pharmaceutical (TEVA US), attributed its big earnings miss to pressures in its generic business. Other generic drug makers, such as ABC, felt the resulting tremors in their stock prices. ABC also lowered its revenue guidance to 5% for the fiscal year from a previous range of 5.5% to 6.5%, blaming an overall decrease in generic drug prices as well as a slowing of drug price increases for branded drugs.

ICPT US        Intercept Pharma fell 27.89% last week after a patient died of liver failure during one of its clinical trials even though the death was likely unrelated to Intercept’s treatment The study was attempting to use its treatment, Ocaliva, to lower LDL cholesterol in patients with a liver disease called Nonalcoholic Steohepatitis. Two of the other patients also dropped out of the study due to pruritus, a common side effect of the therapy. Intercept was rallying off of an earnings beat earlier in the month and the bad news triggered long share holder sales and not short covering as shares shorted has remained relatively stable over the last month

TSLA US                        Tesla had arguably one of the most anticipated earnings reports of last week and it did not disappoint. The electric car maker posted a loss of $1.33 per share and revenue of $2.79 billion compared to consensus estimates of a loss of $1.80 per share and revenue of $2.55 billion. This sent stocks soaring and shares ended the week up 6.5%, enough to lose short sellers $618.3 million in mark to market losses. Ramping up production for its highly demanded new Model 3 will be Tesla’s main focus for the upcoming months. The company intends to use profits from increasing sales in its high-margin vehicles to fund the production and produce up to 5,000 Model 3’s a week.  Tesla short interest is now $10.3 billion and year to date mark to market losses have risen to $4.6 billion.

AAPL US           Apple rose 4.6% on a better than expected earnings report, posting $1.67 EPS and revenue of $45.4 billion compared to estimates of $1.57 EPS and $44.9 billion in revenue. Apple managed to sell 41 million iPhones this quarter, which was surprising to investors and analysts alike as many expected there to be a drop in demand ahead of the highly anticipated iPhone 8, which is rumored to drop in September. During the earnings call, Tim Cook also emphasized Apple’s international growth, which has risen by 25% year-on-year in Asia, Latin America, and the Middle East.

STMP US          After a surprisingly positive earnings report, Stamp soared 41.9% to close at a record-high of $211.25. The online postage company more than doubled its earnings to $2.08 per share, well above analyst estimates of $1.62. Furthermore, sales increased 38% year on year to $116.1 million, compared to estimates of $99.2 million. CEO Ken McBride attributed the beat to reaching its highest levels of both paid customers and average revenue per customer, as well as notable growth in its shipping business. Stamp.com is up 79% YTD, losing short sellers $437 million.  Short interest is at a year to date high of $858 million, with short sellers down $446 million in year to date mark to market losses.

BAC US             Bank of America rose 3.9% in a sector wide increase following the news that legislators will indeed be moving forward in re-writing Dodd-Frank’s Volcker Rule. Though the revision would not be formally implemented until 2020 and does not imply an overhaul on the ban of proprietary trading, the biggest beneficiary would still be the big banks. The revision is expected to give them more flexibility, allowing them to invest more in hedging, avoid compliance costs, and hold more inventory as part of their fixed income market-making.

CHTR US       Charter Communications got a 3.9% price bump as it announced a $1.5 billion sale in senior notes through its subsidiary holdings due 2028. The notes bear an interest rate of 5% per annum and are issued at 100% of the aggregate principal amount. Charter intends to use these proceeds to pay off other expenses and fees as well as for buying back some of its stock. In other news, Softbank has also raised about $65 billion in financing for a potential purchase in Charter equity as it looks to create a substantial merger in the communications industry. Short interest in Charter is up to $3.1 billion and year to date mark to market losses are $920 million.

Want deeper insight into the above analysis?

Contact:  Ihor.Dusaniwsky@S3Partners.net

Managing Director Predictive Analytics, S3 Partners, LLC

For more information on S3’s reporting, data and analytics solutions, email us at sales@s3partners.net

For a free trial of the Black App – the definitive source of real-time short interest – type {APPS BLACK <GO>} on your Bloomberg terminal.

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC (“S3 Partners”) to be reliable and accurate.  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.  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.