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Aug 17, 2016

S3 BLACKLIGHT: Lockheed Martin Short Interest Tops $15 Billion – Short Squeeze to Follow?

Lockheed Martin Corp’s (LMT US) $4.6 billion spinoff of its Information Systems & Global Solutions division to Leidos Holdings (LDOS US) was completed yesterday, August 16th, and the net effect to Lockheed’s bottom line will be less than initially expected. Under the initial terms of the deal Lockheed was expected to buy back 10 million of its shares as a result of the Reverse Morris Trust transaction but only ended up repurchasing 9.4 million. As a result, the EPS impact of the spinoff was 6% less than expected. Lockheed’s stock price is down 1.3% today, to $253.39, and down 3.5% in the last week.

The average short interest in Lockheed Martin prior to the deal announcement was $717 million in 2016 and $656 million in 2015. LMT short interest climbed immediately after the deal and by the end of July short interest had risen to $3.4 billion, twice the highest level we’ve seen in the last five years. Short interest continued to climb and the S3 Shorting Velocity Indicator, a measure of real-time relative change in shorting activity, began to trend higher in the beginning of August. By August 10th short interest had more than doubled to $8.0 billion.

We began seeing small crowding events in the S3 Crowding Indicator, a measure of the magnitude of real-time short activity relative to market cap and float, starting on August 9th culminating with a significant crowding event on August 15th when Lockheed hit its year to date high of $266.50 and short interest almost doubled again to $14.1 billion. Short sellers are showing no signs of fatigue and added $1.5 billion of news shorts today, with total short interest now at $15.5 billion. Lockheed short interest is now up 351% in August and up 3,052% for the year.

With both the S3 Crowding and Velocity Indicator’s corroborating strong short momentum we should see continued short pressure in the near term. Although with $15.5 billion already shorted, many short sellers will be nearing their maximum single name position limits and may be systemically limited from increasing their short positions in any meaningful way.

We’ll be looking for the S3 Velocity Indicator to begin flattening out as short demand subsides. When our trend lines begin their downward trajectory and the S3 Crowding Indicator corroborates with an easing spike we should see a tsunami of buy to covers that lasts for several weeks as outstanding short interest is nearly thirty times the average daily trading volume. The possibility of a short squeeze with everyone trying to exit their short positions at the same time is very high.

Short sellers who have made almost $13/share from this week’s price drop will need to be ahead of the buying to cover stampede or some of their unrealized profits will disappear as LMT’s stock price rises with the increased buy-side demand. Timing the market correctly could result in realized short side profits followed with buying through into a long position and riding a short squeeze to a second profit opportunity.

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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