Stock surge may be a squeeze
Short selling swordplay warps trend
BERNARD CONDON | Associated PressNEW YORK –
Americans are cutting back on luxuries, but you wouldn’t know it from the shares of boat retailer MarineMax.
This seller of everything from tiny Boston Whalers to 100-foot Hatteras yachts hasn’t made a dime in two years, and analysts don’t expect it to do so for at least another.
Yet, shares of the company have nearly quintupled in the past year.
If that seems odd, wait until you hear one reason why: Too many people are trying to push them down.
Investors who are bearish on MarineMax, called short sellers, have borrowed its shares from brokers and sold them, pocketing the proceeds. They eventually have to buy the shares back and return them to the brokers. Their hope is that the price will have fallen by then so they can make a profit.
The problem is, MarineMax stock has gone up, not down, in the past seven months. That means short sellers are facing losses, not profits, and are under pressure to quickly unwind the transactions to limit future losses. To do that, they have to buy shares, which can push the share price up even more.
It’s called a short squeeze, and though many Americans don’t know such a thing exists, much less understand it, it’s driving up many stocks.
That’s a worrisome sign. A market where stock prices are rising is generally good, but not if it’s caused by technicalities like squeezes that could soon peter out, sending prices down and walloping investors who bought while they were climbing.
“People call it the junk stock rally,” says Paul Hickey, co-founder of researcher Bespoke Investments, referring to the market’s remarkable rise since the March lows last year. “Companies most heavily shorted have done the best.”
According to Bespoke, the 50 companies in the Standard & Poor’s 500 with the highest concentration of shares held by short sellers rose 59.6 percent last year versus 23.5 percent for the entire index.
Some losers proving winners in this Alice-in-Wonderland market: struggling Harley-Davidson; airliners facing record losses; Starwoods Hotels & Resorts, whose earnings per share sank 35 percent in the third quarter; homebuilders grappling with record low construction starts; the parent of supermarket A&P, which hasn’t turned an annual profit in two years; and clothes chain Talbots, which hasn’t in three.
Of course, stocks overall have surged since March mainly because of improved business prospects, not short squeezes. And it’s impossible to know how much squeezes are pushing up even individual shares. But chatter on Internet bulletin boards, griping by hedge funds on the losing end of squeezes and some curious stock moves suggest a lot.
After Sears Holdings announced in early January that fourth-quarter results would probably come in better than expected, the stock didn’t just rise, it leapt – up 12 percent in a single day. The stock is now more than double its level of a year ago.
To be sure, Sears stock was arguably beaten down too far in March when capitalism itself seemed in danger of extinction. The shares were trading at $34 then, down from $100 just six months earlier.
But Sears isn’t exactly posting terrific numbers. Revenue was expected to fall in its fiscal year ending Jan. 30. Market share? Rivals have been stealing customers from Sears stores and its Kmart chain for years. Same-store sales, or sales from stores open at least a year? They’re falling, too.
One possible reason for the jump: A third of Sears stock available for trading, or its float, is held by people who hate it – short sellers who’ve been scrambling to buy it lately.
Sears won’t comment.
Or take Winnebago Industries, the maker of motor homes.
Bulls cheered in December when it announced a big jump in orders it expected to fill in the next six months.
The problem is, according to the bears, it will need to sell more than twice as many RVs, then do it again in the second half of 2010, to break even for the year.
So why has the stock more than doubled in the past year? Shorts who own 15 percent of the shares appear to have been forced to buy, and the betting among some bulls is there’s more to come.
Winnebago spokeswoman Sheila Davis says the company may draw shorts because anyone who wants to bet against the economic recovery immediately recognizes its name.
She says Winnebago could break even on far fewer sales than bears project, depending on RV prices this year and the mix of models sold.
Even if the shorts are right, though, the stock could rise for a while yet. That’s because as shorts target a stock they often draw a new kind of bull to the company, one who is betting on a squeeze instead of fundamentals.
Their gamble: A little positive news, like a surge in orders or a fall in the unemployment rate, will set off a cycle of ever rising prices. Purchases from shorts lead to more brokers demanding shares be returned from more shorts, which leads to even more buying.
Time and again, shorts who correctly analyzed companies’ prospects lose big anyway. They were right on Crocs, for instance. Shares of the maker of the eponymous plastic shoes fell from $69 in October 2007 to a low of $1 last spring. The problem was they didn’t go straight down and stay down. So anyone who sold the shares short near that low hoping the company would go out business lost big as they rallied to a recent $7.51.
“These one-trick pony companies always end up in tears, and the shorts eventually are right,” says Ivan Feinseth, who runs New York-based hedge fund AlphaWorks and who sells stocks short as well as long. “But there’s a lot of pain along the way.”