XPO Logistics, Inc (XPO) is down over 26% today after Spruce Point Capital Mgmt released a “strong sell” investment research report on the company. Spruce Point reports “financial irregularities”; $4.7 billion in debt and “dependency on external capital and asset sales” due to the “inability to generate sustaining free cash flow” to forecast a 40%-60% short-term downside and a 100% long-term downside.
XPO is the fourth most shorted stock in the U.S. Air Freight & Logistics Sector, after being the most shorted stock in the sector for most of the first half of the year. XPO’s short interest is $396 million; 6.57 million shares shorted; 5.24% of its float and trading at general collateral levels (the cheapest borrows for the easiest to borrow stocks.)
XPO short sellers have been losing their conviction in 2018, trimming their positions in the first half of the year, with shares shorted decreasing by 2.3 million shares, or -16%. But in late July to early August, short sellers exited the XPO trade is size with 5.1 million shares covered, or 41% of the total shares shorted at the time. While this 7.4 million of short covering occurred during a period of relative XPO price stability, over the past three months shorts have been buying to cover into XPO price weakness. Shorts have covered 2.1 million of their positions in the 4th quarter as XPO’s stock price declined by 39%. Short traders were not only exiting their XPO shorts, but were trimming short exposure in the entire Air Freight & Logistics sector with short interest declining $426 million, or 10%, going into the holiday season.
XPO short sellers were down $134.7 million in mark-to-market losses in the first half of 2018, and with today’s price move, up $389.7 million in mark-to-market profits in the second half of the year. Shorts are up $255.0 million in mark-to-market profits for the year, +24.45%.
With today’s price move and Spruce Point’s “strong sell” recommendation we should see increased short selling in XPO. Getting back to the recent September shares shorted highs would add 2 million shorts to today’s totals, and getting back to year-to-date highs would add 7.5 million shares shorted. Any long shareholders who are selling stock into this news will have company with short sellers rebuilding their positions.
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Managing Director Predictive Analytics, S3 Partners, LLC
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