After hitting a historical low of $5.54 on Thursday, Sears Holding Corp (SHLD US) is up 30% today on news that its restructuring plans will save $1 billion in operational costs and increase its liquidity and access to funding by reworking its existing debt load, all while continuing to sell off of some of their real estate assets as well as product lines.
Sear’s bond ratings were recently cut by both Moody’s and Fitch as Sears has been surviving on asset sales, primarily real estate, and product line sales such as Land’s End and Craftsman. The ratings agencies and investors fear that Sears needs $2 billion per year to fund its operations and they will eventually run out of assets to sell or put up as collateral. CEO, and Sears’ largest shareholder, Eddie Lampert needs to turn around its money losing operations before time runs out.
Short interest has grown slightly since late January, but is still well below previous year’s balances due to Sears’ price decreasing every year. Short interest is $141 million, up $4 million since mid-January, but down $63 million from its 2016 average short interest. Sears’ short interest will be relatively stable at these levels as almost all lendable shares have already been taken down.
There is no Sears short squeeze at the moment. Short sellers were up $75.1 million in net of financing mark to market P\L, up 36.66% fee, in 2016. Even after paying a 31.3% average borrow cost on their average short position of $204.9 million, which incurred $65.3 million of short financing cost, short sellers kept taking down shares in order to increase their notional short exposure as Sears’ stock price fell.
Short sellers continued to be profitable in 2017, making $50.3 million in net of financing mark to market P\L through February 9th. Sears’ average borrow cost rose slightly, to 33% fee, and present stock borrow costs are even higher, ranging from 45% to 50% fee. Today’s price increase cost short sellers $31.4 million in P\L, but they are still up $18.9 million for the year, or 9.5%.
We are seeing some stock borrow recalls in SHLD, but not enough to constitute a short squeeze. Today’s price spike may influence some short sellers to close their positions and realize their long term gains, but we are not seeing significant buy to cover activity yet. Long shareholders may see this as an opportunity to exit their positions, but after being down over 64.5% since 2016 they might want to stick around to see if CEO Eddie Lampert can turn Sears around. If long shareholders do begin selling their holdings there is a chance that SHLD’s stock borrow supply may decrease, forcing stock borrow recalls to return shares that were put on loan. If large lending shareholders like Vanguard, State Street and Blackrock sell out their long holdings we may see a short squeeze precipitated by their stock borrow recalls. Otherwise, expect SHLD’s short interest to remain fairly stable and not give Eddie Lampert a tailwind to move Sears stock price even higher.
For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC Ihor.Dusaniwsky@S3Partners.net
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