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Mar 23, 2017

S3 BLACKLIGHT: Sears Holdings Bears Had Paper Gain of $19.7 Million Yesterday

Sears Holdings Corp (SHLD US) closed down 12.3% yesterday as investors questioned the ability of the retailer to keep it doors open much longer.   This comes after the company added language to its annual report that doubt exists to continue as a “going concern”, music to short sellers’ portfolios.  Bearish speculators reaped a mark-to-market paper profit of $19.7 million off the back of the one day price drop yesterday, even as fees to borrow the shares are trading as high as 99% fee on an annualized basis. 

Historically, Sears has been an extremely popular short within the hedge fund community for as long as a decade, when short interest peaked at $2.3 billion back in 2008.  Although real-time short interest is now projected to be as low as $143.5 million, our data is indicating that over 90% of the available supply in lending programs is still being utilized by short sellers.  With such conviction to stay short, a major catalyst for any significant short covering/buying back to occur, would be for a large lender like Vanguard, State Street, or BlackRock (who are all top 10 holders of the name) to finally start unwinding their long exposure.   Of the 18 million shares currently out on-loan, these three large lenders potentially make up 25% of the total lending market in the stock.  Any large sale will trigger recalls street-wide, potentially squeezing shorts.  

For 2016, average short interest was $203.1 million, with short sellers netting a paper profit of $78 million, yielding a 38.53% return.  So far in 2017, average short interest has been $141.5 million, with shorts surprisingly in the red by $3.6 million, or down 2.54% so far.   Since the majority of alpha occurred last year, shorts are now waiting to cover to finally realize those gains. 

With borrow currently so illiquid and expensive in SHLD, plus the potential of a short squeeze, non-believers of Eddie Lamperts turn-around plan may look at SPDR S&P Retail ETF (XRT US) as a short, with the cost to carry only 2% fee.   This cheaper alternative gives exposure to some other popular bearish bets, most notably JC Penny (JCP US) and Nordstrom (JWN US), whose short as a % of float are over 20% currently.

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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