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Apr 27, 2017

S3 Research: Shorts Now Holding 50%+ of Rent-A-Center Shares; Negative Bets at Three-Year High

One cannot tune into business networks, or open up a financial publication, without seeing an activist investor in the headlines campaigning to drive a company’s stock price higher.  Whether it’s Elliot vs. Arconic, Marcato vs. Buffalo Wild Wings, or Jana vs. Whole Foods, all are currently in proxy battles with the respective boardroom.  Another one can now be added to the list:  Engaged Capital vs. Rent-a-Center (RCII US).
Since Engaged Capital disclosed that it boosted its stake to over 20% of Rent-a-Center on March 23, the rent-to-own merchandise store for home goods’ has seen its share price surge by almost 30%.   This rise in price is intriguing, as this activist investor may not be the only one the board may be going up against as short interest has also hit a multi-year high on the name. 
S3 Partners’ real-time short interest is calculating 26.5 million shares out to short sellers and as much as $288.2 million of real money currently at risk on the short side.  With a float of 51.6 million, this would put over half the shares into the hands of short sellers’.   
Short interest hasn’t been this high since three years ago, when it peaked on 4/30/14.  While only 10.5 million shares were sold short at this time, $307.8 million were at risk as the stock was trading at $29.21, close to 3x its current valuation.  Fast forward a few years to 2016, when the stock bottomed out in mid-October, again causing shorts to increase their negative bets, this time by 266% on a notional basis (from $78.6 to real-time $288.2 million), and 202% on a share basis (from 8.8 to real-time 26.5 million).   
Bearish speculators may be skeptical of the premium being priced into the shares now that Engaged, and more recently Marcato, are pushing for a potential sale of Rent-a-Center.  This has resulted in borrow utilization approaching full capacity, and stock loan financing rates trading close to 9% fee per year.  With a days-to-cover ratio of 13 days, and 50%+ of floated shares out on loan, any positive news will be sure to push the shares higher, with an additional boost as shorts look to cover their positions.  The first catalyst may be as soon next week, May 1, when the company is due to announce first quarter earnings.  
Want deeper insight into the above analysis? Contact:
Director, S3 Partners
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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