Short sellers increased their bets against some of the biggest names in US retail ahead of the holiday season — and their bearish bets already appeared to be paying off after some early earnings figures triggered a market sell-off.
Short sellers, who profit when a stock drops in price, enjoyed a $507m paper profit on retail shares on Tuesday alone, according to S3, a financial analytics and technology firm. Sharp declines in the department store chains Macy’s and Kohl’s contributed significantly to the total.
S3 said short sellers now have $7.8bn of outstanding bets against retailers, up $121m this month in the lead-up to the release of third-quarter earnings reports and the holiday shopping season that begins after Thanksgiving next week.
The increase marks a reversal from the January-October period when speculative bets against the sector dropped by $998m in the face of rising share prices for some retailers that left many short sellers burnt.
Kohl’s sent a shiver through the sector on Tuesday as its recovery from two successive quarters of comparable sales declines was weaker than hoped. Shares closed 19 per cent lower on the day, a boon for short sellers who had ramped up bets against the department store chain in the weeks ahead of its earnings.
There is still far too much retail space in the US and the next two years will bring on many more bankruptcies and store closures
Doug Kass, Seabreeze Partners ManagementIhor Dusaniwsky, managing director at S3, said short sellers also increased their bets against Macy’s, Target and Nordstrom ahead of retail earnings season.
A $500m-plus paper profit for short sellers in a single day is “a huge move for a sector”, Mr Dusaniwsky said. “We are seeing pretty much top-to-bottom negative sentiment and associated long selling in the market,” he said.
Short sellers are having to weigh up mixed data about the financial health of the US retail sector. Some companies are successfully adapting to the age of ecommerce while others are forced to close stores and cut jobs.
Winners include Walmart, which last week lifted annual profit forecasts on the back of higher quarterly sales. Wall Street analysts have also pencilled in a 3.6 per cent rise in like-for-like sales at Target, which is due to report earnings on Wednesday.
“There is still far too much retail space in the US and the next two years will bring on many more bankruptcies and store closures,” said hedge fund manager Doug Kass of Seabreeze Partners Management in Palm Beach, Florida, who has shorted retailers in the past. “When stores close, merchandise will be on sale, exacerbating the retail disruption even further.”
Mr Kass said he has been buying shares in Amazon, which he characterises as “the disrupter” of the retail industry.
Shawn Kravetz, founder and president of Esplanade Capital, which specialises in retail and leisure stocks, said if the firm were to short retailers, “we would short the highly marginal department stores and speciality retailers, but their stock prices have been crushed”.
Mr Kravetz has opted to invest in Apple shares as it “satisfies both categories of scale and differentiation”. He said Apple “does not have an overly demanding valuation but nonetheless is up 69 per cent year-to-date at all-time highs”.
By: Albuquerque Business First
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