With revenue relatively flat since 2016 and EPS projected to decline after hitting a 10 year high of $0.71/share in 2017, traders have been increasing their short exposure to the U.K. pub owner Greene King PLC (GNK LN). Greene King is presently the second largest short in the European Restaurant sector as short interest increased by $56 million over the last month and $88 million, or 25%, year-to-date. Shorts have had a wee dram of success in 2018, up $29.3 million, +7.40%, in year-to-date mark-to-market profits.
In 2017 Greene King short interest increased fourfold, from $88 million to $353 million and shorts were up $19.7 million, or +9.79%, for the year. Short sellers began to increase their short exposure to Greene King in July 2017, just after its stock price had a 15% correction following its early year 38% gain. With Greene King’s stock price still rising shorts took an 8% loss over the next month but continued to increase their short bets into the rally. Eventually, shorts had tripled their short exposure when Greene King’s stock price fell 28% after almost hitting 700 gbp in early August.
Shares shorted, which had averaged just over 25 million shares in 2017, have continued to grow in 2018 as short sellers continue to back up their bets as Greene King’s stock price declines. Short sellers have increased their shares shorted by 25% in 2018, climbing from 47.3 million to 59.5 million shares in less than two months. With this steady flow of short selling, stock borrow costs have inched higher. Greene King was a General Collateral level stock borrow, the cheapest stock fee for the easiest to borrow securities, but over the past several weeks stock borrow rates have increased to the 0.75% fee to 1.00% fee level. There is still plenty of stock available to borrow, so rates should stay at the 1.00% fee to 2.00% fee level for quite a while, or at least until another 10 million shares are shorted.
With its next quarterly report not due out till the end of June, short selling may be more technically based and not just value based over the next several months. Recent price weakness, which has shown both lower lows and lower highs will add more technical shorting into the trading mix and the possibility of breaking the 500 gbp support level will entice additional short selling with technical price targets of 450 gbp to 470 gbp. Unless Greene King can improve its operating performance and continue its cost cutting short sellers will have no reason to close out their positions. And if its stock price continues to decrease, short sellers will be tempted not only to keep their place at the bar but enjoy another round.
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Managing Director Predictive Analytics, S3 Partners, LLC
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