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Dec 19, 2016

S3 BLACKLIGHT: Ultimate Software the Ultimate Short?

If you follow Spruce Point Capital and Soapbox Research the answer would be a resounding “yes”, with both investment research firms recently releasing skeptical reports on the cloud-based human resource software company (ULTI US).  In particular, Spruce Point calls it a “strong sell” seeing 20-40% downside, highlighting excessive executive compensation, and the company having “amongst the worst corporate governance ever seen.”

According to the S3 Short Interest projection, a measure of the real-time relative change in shorting activity, our data is indicating continuous shorting during the first two weeks of December (the exchange reported short interest figure for Dec 15th is disseminated on Dec 27th).  This is in line with the increasing trend in shorting action seen since the beginning of September, when short interest exposure hit a 2016 low of $276 million.   The acceleration of this short selling into year-end has now put short interest exposure at a 2016 high of $433 million, or 2.3 million shares currently out on loan, up 58% from the preceding 2016 low.  The last time short conviction was this elevated on a notional basis was August of 2015, when short exposure hit its all-time high of $455 million, a peak that can be easily eclipsed moving forward at this pace.     
Borrow liquidity is still robust for the bears who want to either add to existing shorts or engage in a new trade with an estimated $1 billion of additional supply currently housed with lenders at general collateral/cheapest rate.   However, if the latest increase in demand stays the course, an uptick in financing cost will “ultimately” follow suit, chipping away at the sought after alpha on the stocks downside.     

For more information on the above analysis, please contact:
Matthew Unterman, Director, S3 Partners, LLC    

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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