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Mar 8, 2017

S3 BLACKLIGHT: Tax Fraud Allegations Not Enough to Bring Back Caterpillar Short Sellers

Caterpillar Inc. (CAT US) short interest had been climbing through all of 2016 along with its stock price, hitting a historical high of $3.9 billion in late November. Short sellers remained steadfast in their positions even as CAT’s stock price rallied 35% in 2016. CAT short interest has recently dropped down to $2.5 billion, 35% off its November historical high and down 21% in 2017.

CAT stock is down $1.59, or 1.68%, on reports that the U.S. government is investigating the company regarding accusations of tax fraud carried out by its Swiss affiliate. No charges have been filed as of yet and CAT has stated that they believe all transactions with their Swiss affiliate followed applicable tax laws. Today’s price decline produced a $43 million mark to market profit on CAT’s $2.5 billion of shorts.

Short sellers may be loath to jump back into the name as their perseverance in holding onto their short positions from 2016 to 2017 resulted in losses totaling just over $1 billion. CAT short interest averaged $3,245 million over the last 14 months and generated a 32% net of financing mark to market loss.

Short sellers continued to bet on the continued drag of low commodity prices on Capex spending to keep equipment demand low. But with the Chinese and Brazilian markets in a slight recovery mode and the golden ticket of a $1 trillion Trump stimulus plan looming on the horizon U.S. machinery stocks like Caterpillar have recovered from lows not seen since 2010. The potential increase of worldwide agricultural, construction, energy and mining demand has buoyed the stock prices of industry leaders Caterpillar, John Deere (DE US), Komatsu (6301 JP), Agco Corp (AGCO US) and CNH Industrial (CNHI US).

We have not seen a spike in CAT’s short selling today in response to the U.S.’s tax fraud allegations, but if the Trump stimulus plan is delayed significantly and commodity prices slump we may see short sellers come back and try to recoup some of their 2016-2107 losses.  

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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