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AUG 5, 2016

S3 BLACKLIGHT: Over 30 Million shares shorted in Lockheed Spinoff to Leidos

Leidos Holdings Inc. (LDOS US) is merging with a spinout of Lockheed Martin Corp’s (LMT US) government I.T. services division to become the largest government service contractor at a market cap estimated to be $10 billion. The deal is a complicated set of transactions in order to comply with Reverse Morris Trust requirements that would render the deal largely tax free. When the deal is completed Lockheed Martin shareholders will own 50.5% of the new Leidos entity.

On June 30th, prior to the deal announcement on July 11th, Leidos short interest was $102 million but rose 88%, to $192 million on July 8th, the Friday before the official announcement. After the announcement, short interest rose to $410 million by July 15th and is presently at $716 million, up almost 900% from LDOS’s pre-deal year to date average short interest of $72 million. The S3 Crowding Indicator, a measure of the magnitude of real time short activity relative to market cap and float, has been spiking since the deal announcement as short sellers continue to accumulate their positions. The S3 Velocity Index, a measure of real time relative change of shorting activity, started trending upwards on July 7th with all three trend lines, the 7 day, 30 day and 90 day, now sloping upwards at a steep rate.

Lockheed Martin’s short interest was $620 million on the Friday before the announcement, down 10% from the previous week, and rose 211%, to $1.9 billion by July 15th and is presently at $3.9 billion, up 438% from LMT’s pre-deal year to date average short interest of $717 million. Because of Lockheed’s large market cap the S3 Crowding Indicator has only shown minor tremors since the deal announcement but the S3 Velocity Indicator has been trending steeply upward since July 13th.

There is still an enormous amount of stock available to borrow for LMT and the stock has traded at general collateral levels, the cheapest borrow cost for the easiest to borrow stocks, throughout the deal. LDOS was also a general collateral borrow before the deal announcement but climbed to a 2% fee within a week of the announcement. Borrow cost has risen steadily since then and most of the stable availability has already been taken down. Although there is still stock available to borrow, there have been over 500,000 shares recalled in each of the last two days which is pressuring rates further. The borrow cost on existing shorts is up to an 11.5% fee while new positions are going at the 22% to 25% fee level.

The 15 million shares of stock shorted in each of these two companies represent a large multiple of their average daily trading volume. It will take 16.1 days of average trading volume to cover LDOS’s short position and 9.6 days to cover LMT’s. Stock prices will be bid up in both names for several weeks after the deal closes.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC Ihor.Dusaniwsky@S3Partners.net

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 decision.

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