S3 Research: IBM Short Interest at Lowest Level Since February 2013

International Business Machines Corp (IBM US) reported better than expected 1^st Quarter earnings, but missed on revenues when it released earnings after the close on April 18^th.

Short interest levels are down $1 billion, or 26%, to $2.8 billion this year. IBM’s short interest has averaged $3.6 billion over the past 5 years, and the last time short interest was below $2.8 billion was in February 2013.

IBM’s short interest has moved in tandem with its stock price over the last several years, but it began to diverge from this pattern in 2017. IBM’s stock price is up 3% in 2017, while short interest is down 26%. IBM’s revenues have been on a downward trend since 2011 as the company continues to transition itself from a computer and mainframe producer to an IT services and software provider. While sales and net revenues have suffered during this metamorphosis, revenue projections are showing that the yearly declines should disappear by 2018 and turn into earnings growth by 2019.

Long shareholders have been trading the stock up in anticipation of this reversal, pushing IBM’s stock price up 20.6% in 2016 and 3.1% year-to-date in 2017 after suffering through a 14.2% loss in 2015. Short sellers are now joining the herd by buying back just over a quarter of their positions in 2017.

While long shareholders were raking in the profits for almost a year and a half, short sellers have been taking it on the chin, losing $693 million, down 20.3%, in mark to market P/L in 2016 and $133 million, or down 3.7%, year-to-date 2017.

Short seller’s 2017 losses could have been much larger, but when IBM’s stock price became slightly overheated and hit a recent high of $181.95 on March 1^st, long holders sold off some of their stock to lock in a quick 10% return in 2017. Sales by long shareholders eventually pushed IBM’s stock price back down into the low $170’s. Short sellers are up $213 million, or 6.46% on this decline. This stock price drop could have been much worse, except for the fact that since the beginning of March short sellers covered over 4 million shares of their open positions, which offset some of the effect of the long shareholders selling their long holdings.

With IBM’s stock price trading up from last week’s lows, it seems both the longs and some shorts are bullish on the stock. In fact, investors are bullish on the I.T. Consulting and Services sub-industry, with the sector’s short interest down over $1 billion in the last month and the Vanguard I.T. Index Fund (VGT US) up 10.7% year-to-date.

Short interest in the I.T. Consulting and Services sub-industry is $9.7 billion, down $1.1 billion, or 9.8%, for the month and down $124 million, or 1.3%, for the week.

Want deeper insight into the above analysis?

Contact:  Ihor.Dusaniwsky@S3Partners.net

Head of Research, S3 Partners

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