Shares of Fred’s Inc. (FRED US), the discount retailer that operates a chain of full-service pharmacies in the U.S., are up 65% since announcing an agreement to purchase 865 stores from Walgreens and Rite Aid on 12/20/16 for $950 million in cash. The jump in stock price pales in comparison to the magnitude of short sales that have been executed in the stock after this purchase announcement.
According to the S3 Short Interest projection, a measure of the real-time change in shorting activity, short interest measured on a notional basis has soared by as much as 550% since the proposed acquisition was disclosed. Short interest exposure, which we measure as real money currently at risk, is now sitting at $255 million, a multi-year high, compared to $39 million on 12/15/2016. We estimate as much as 14 million shares are now out on loan to short sellers, and as much as 40% of float.
Furthermore, according to our proprietary S3 Crowding Indicator, a measure of the magnitude of real-time relative change in shorting activity, our data has registered a cluster of 8 days of crowding events over the past 2 weeks of trading (this metric signifies that the short side of a security had significant activity relative to its history). The cost to borrow shares has been trending upward and is now roughly 5% on an annualized basis, however with the majority of supply now close to being fully utilized we expect borrow rates to trend higher from this point.
Although there has been recent speculation that the Federal Trade Commission will ultimately approve the Walgreen/Rite Aid deal, paving the way for the Fred acquisition to be finalized, short sellers are certainly positioning themselves for a potential windfall if the transaction fails. This would be one pill that would be easy to swallow for the bears.
For more information on the above analysis, please contact:
Matthew Unterman, Director, S3 Partners, LLC
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