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Mar 2, 2017

S3 BLACKLIGHT: Chanos May Be Short CarMax – Will Others Follow?

Shares of CarMax (KMX US) traded down as much as 3% yesterday before ending the day up 1% after CNBC host Scott Wapner tweeted that legendary short seller Jim Chanos of Kynikos Associates may have recently initiated a short position in the pre-owned automobile retailer.  The intriguing part about this CNBC report is that short interest has been on the downtrend in CarMax over the past 3 months, so if the report is correct, Chanos is getting in the driver’s seat after others have left.  

S3 is forecasting real-time short interest exposure, i.e. real money at risk, in CarMax to be at $1.1 billion currently, or approximately 9.25% of float.  This would equate to a 32% decrease from November, when short interest exposure was reported to be $1.6 billion, or 15% of float.  The price of CarMax shares have traded 16% higher since November, resulting in a mark-to-market paper loss of $225.8 million to short sellers, net of financing fees, to borrow the stock and maintain their positions.

One would need to go back to October of 2015 to find the last time short interest exposure was below the $1 billion threshold, and quantity of shares out on loan to borrowers below 17 million.   At the current pace, prior to the Chanos report, there was a good chance short interest would have revisited these lows as buy-to-covers continued.   Taking a look at real-time borrowing activity in the securities lending market today, we are witnessing a skew to renewed shorting. 

It will be interesting to see if Chanos discloses whether he is indeed bearish on CarMax as he historically has divulged certain shorts - including Tesla, Caterpillar and Lending Club recently.   In the interim, we are starting to see an initial reaction with shorts starting to shift gears, and interest revving back up.     

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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