• Research

Dec 6, 2016

S3 BLACKLIGHT: Short Interest Rises Along With Kite Pharma’s Stock Price

After nearing its year to date low on November 3rd at $40.01/share Kite Pharma Inc’s (KITE US) price quickly rebounded to over $50/share and is now up over $14, or 33%, since November 3rd. Kite is up over $2/share in the last two days in response to its blood cancer treatment, KTE-C19, passing two clinical trials allowing the company to begin its marketing push for the medication.

After seeing buy to covers in January of this year and short interest dropping from $301 million to less than $250 million, we have seen short interest climbing slowly but steadily since February. Short interest rose to $370 million by the end of the 3rd quarter, up $70 million, or 23%, for the year. Short sellers kept their positions open and did not close out their shorts in order to lock in profits as Kite’s stock price fell to $40.01 in early November and were treated to an abrupt price rebound to over $50/share within a few weeks. Actually, even as Kite’s stock price increased, short sellers were building up their positions and by mid-November short interest was up another $70 million to $440 million.

With Kite’s stock price rallying to $53/share today, short sellers have not only kept their positions open, but continued to build them up. Short interest is at an historical high of $507 million today, up $67 million, or 15%, since mid-March. This recent short activity has eaten into Kite’s borrow inventory with borrow rates now at 2% fee. There is still stock available to borrow with over 4 million shares ready to be lent. If short selling continues we will be seeing borrow rates creeping up quickly, and once half the available shares are taken down we should be seeing borrow rates over 5% fee and speeding towards 10%.

Kite Pharma illustrates why Short Interest as a Percentage of Float can be a misleading metric. Kite’s borrowable shares (shares in stock lending programs) is slightly more than 1/3 of their float while a stock like Valeant Pharma (VRX US) has almost 2/3’s of their float in stock lending programs. If Kite’s short interest rises to 33% of its float, its borrow rates would rise substantially, recalls would begin and we would be looking at the start of a traditional “Short Squeeze”. Meanwhile, if Valeant’s Short Interest rises to 33% of its float, its stock borrows would still be at General Collateral levels (the cheapest rate for the easiest to borrow stocks) and the stock would still be very far from a traditional “Short Squeeze”.

Kite short sellers are looking for its stock price to take a breather and temporarily reverse course from its recent 32% rise. A value or fundamental investor would probably be long Kite stock, especially after its recent successful drug trials so these short sellers are more than likely momentum traders selling on upticks and waiting for the stock price to fall. If its stock price continues to rise, and shorts continue to grow, short sellers will be feeling pain not only from their daily price mark to market but also from increasing borrow costs – getting hit from both sides may trigger some buy to covers from the less committed short sellers, drive Kite’s price up even further, and trigger the beginning of a Short Squeeze. If Kite’s stock price plateaus or falls and short interest stays flat the chance of a Short Squeeze are minimal.   

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

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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