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Jul 14, 2017

Wayfair Stock Price & Short Interest Continue To Climb

Online retail household goods retailer Wayfair Inc. A (W US) is up 120% for the year and is the best performer in the Retail sector. It has weathered the Amazon (AMZN US) storm and is poised to take advantage of the growth of online household goods sales. As smaller competitors fall by the wayside and Amazon pursues a diversified growth strategy, this may allow Wayfair to anchor a foothold in the sector that will be difficult or impossible to dislodge.

While Wayfair’s stock price continues to trend higher, up 22% in June and July, short sellers have not reduced their exposure to the company. In fact, Wayfair is the sixth largest short in the U.S. Internet and Catalog Retail sector with short interest up $58 million over the last month.

Even though shorted Wayfair shares have decreased 27% in 2017, short dollars at risk has increased steadily throughout the year. In the beginning of the year, traders had to ante up 7 red $5 chips ($35) every time they wanted to short Wayfair, today they have to toss 3 green $25 chips ($75) into the pot in order to stay in the game. Although the number of chips bet in every hand has decreased, everyone is playing at a higher stakes table and the pot keeps getting bigger and bigger.

Short sellers continue to have conviction in their Wayfair short thesis, but by only looking at the decline of shares shorted or a drop in short interest as a percentage of float it does look like they are abandoning their trades in the wake of incurring $509 million in mark to market losses this year. In actuality, Wayfair short exposure is up 63% for the year, to $665 million, showing that shorts are building their positions and looking for a stock price reversal from Wayfair’s recent historical highs.

Both shares shorted and notional short interest were increasing in the 1st quarter 2017 but shares shorted started to decline as short interest hit the $600 million level. Short sellers seem to be content with having between $600 million to $700 million of short exposure in Wayfair, which has been the case for the last three months. Shorts are buying to cover their shares whenever total short interest broaches the $700 million level. Traders are actively managing their exposure but are not reducing it.

With shorts already down $509 million for the year, it looks like they are in it for the long haul to try and recoup their losses. Shorts are looking at the river card and hoping that Amazon will flex its muscles in the home furnishings space and push Wayfair’s down and are dreading potential takeover rumors by Wal-Mart (WMT US), Target (TGT US), Lowes (LOW US) or Home Depot (HD US) which would push Wayfair’s price up.  

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, 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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