All carry short interest as a percentage of shares outstanding of 20% or more, says an Investor’s Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. That’s more than 350% more than the typical 4.4% short interest in S&P 1500 stocks. And bets against the stocks are still high, even as short selling is down nearly 16% in the S&P 1500 and off 8% in the S&P 500.
It’s almost like short-sellers are just asking for it.
‘Self-Fulfilling’ Pain For Short Sellers
Short sellers, who bet a stock will fall, face unlimited losses if it rises instead. And that’s a major risk that’s paralyzing many of these bearish investors.
Online investors can rapidly mobilize using online forum’s like Reddit’s WallStreetBets (WSB) and push shares up fast. Moves in GameStop (GME) and AMC Entertainment (AMC) already amped up the danger of shorting. The risk of overnight rallies is causing shorting to fall across the market. And not just small companies or low-priced shares. Shorts are more nervous about touching larger S&P 500 stocks, too.
“The online discussion on the WSB subreddit had a substantial negative impact on the profitability of shorting strategies across a number of stocks — even those that were neither heavily discussed on the subreddit, nor experienced an unusual increase in retail buying volume,” says Nicolae Gaarleanu of the University of California, Berkeley and Stavros Panageas of University of California, Los Angeles in a new working paper with the National Bureau of Economic Research.
Data bear out their findings. Average short interest in S&P Small Cap 600 companies dropped this year to 4.8% from 5.7% last year before the GameStop frenzy. And it’s down to 2.23% in the S&P 500, falling from 2.43% in late 2020.
“Events surrounding GameStop spread fear among short sellers,” the authors found. “We develop a model that explains how such fears can become self-reinforcing and go as far as to cause a collapse in share lending and short selling.”
Short Sellers Are Down, But Not Out
Short sellers are certainly more nervous than they were. But they’re not giving up completely.
Much short selling activity is still taking place in the S&P 500 consumer discretionary sector, says a report from S&P Global Market Intelligence. As of the middle of August, shorts controlled 4.6% of shares outstanding of companies in the sector. That’s down by about a third since mid-March of 2020, but still double the S&P 500’s average and higher than any other sector.
Short sellers think they can scoop up gains if the consumer discretionary sector races up too fast, given the stubbornness of Covid-19 infections. The Consumer Discretionary Select Sector SPDR (XLY) is up nearly 110% from the low on March 23, 2020.
Doubts In Discretionary
The strategy of short sellers’ bets against consumer discretionary is clear. It’s a top target among the S&P 1500 and S&P 500.
Three of the most heavily shorted S&P 1500 stocks all hail from the consumer discretionary sector. And the most heavily shorted of them all is PetMed Express. Short sellers control 23.5% of the company’s shares outstanding. Shorts are emboldened, too, as the pet pharmacy’s shares are down more than 12% this year. The company’s third-quarter profit is seen dropping 9.5%.
Bed Bath & Beyond, a struggling home goods retailer, still hasn’t shaken out all the shorts. It’s one of the early Meme stocks, with its shares jumping more than 56% this year. Even so, more than 21% of its shares are controlled by shorts. Granted, that short interest is down from 58.5% in late 2020.
And while short interest is down across the board, in some cases the bears are feeling especially bold. Short interest in medical equipment maker Invacare is higher than in any other S&P 1500 stock at 26%. And that’s up from less than 14% at the end of 2020.
Seems like the short sellers are just playing a game of chicken with the meme crowd.
Most Shorted S&P 1500 Stocks
|Company||Ticker||Short interest % on Dec. 31, 2020||% short interest now||Stock YTD % ch.||Sector|
|PetMed Express||(PETS)||30.4||23.5||-12.2%||Consumer Discretionary|
|GEO Group||(GEO)||16.5||23.3||-10.2%||Real Estate|
|Bed Bath & Beyond||(BBBY)||58.5||21.2||56.0%||Consumer Discretionary|
Sources: IBD, S&P Global Market Intelligence
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