The Wall Street Journal reported yesterday in its listing of the New York Stock Exchange's short interest data that Blyth's (NYSE: BTH) shares are being shorted more aggressively than any other listed company. The "Short as a Percentage of Float" measure indicates how many of the shares that are actually available to be traded by the public have been sold short. In layman's terms that essentially means that speculators have borrowed shares of Blyth and sold them so they can buy the stock when it trades lower to repay the "borrowed" stock and they have now done it so much that there are not that many left that it can be done with. There are 6.85 million Blyth shares that are available to be traded and the remaining shares are owned by the company's executives. For reference, BTH has had nearly 75% of its free trading shares sold short vs. the current high profile short squeezes of Herbalife (NYSE: HLF) and Tesla (Nasdaq: TSLA) that occurred with only 32 - 33% of their float sold short. We think the current trading range is a short term aberration and that the timing of this supply/demand imbalance could result in one of the greatest short squeezes in the history of the New York Stock Exchange if several factors come together. Regardless whether some or none of them occur, we believe that a significant move to the upside is imminent and may serve as the catalyst for some of these factors discussed below to occur.
I learned about Blyth in the course of reading articles related to the Herbalife (NYSE: HLF) saga. While I did not take a position on either side, over the course of 2013 I have found myself constantly clicking over to read the latest in the ongoing soap opera that is the Herbalife short squeeze trade. It has been fascinating on many levels, but for me the most interesting is knowing how Herbalife distributors had to listen to Hedge Fund manager Bill Ackman rip their company to shreds in a public forum while boldly predicting that he will short the stock until it is at zero. While most watchers of this drama are aware that Carl Icahn, George Soros and Robert Chapman bought shares of Herbalife heavily in the days and weeks following Mr. Ackman's presentation, I wondered how many Herbalife distributors were not only energized to sell more to prove Mr. Ackman wrong, but spurred to actually put a little skin of their own into the game by buying HLF shares. It is well known that Mr. Ackman and all those on the short side of the HLF trade have taken a bath on that position and one of the most interesting aspects has been the slow and methodical way the stock has moved higher over many months. While there is really no way for us to know how many Herbalife distributors/sales reps have helped this process along by buying Herbalife shares, anecdotal evidence suggests that they have played some role in helping the short squeeze along and they are laughing all the way to the bank as the resulting short squeeze has left Mr. Ackman and his cronies sitting on losses closing in on 100%.
In searching for Herbalife news, I ran across an article or two discussing Blyth and the large and growing short interest there. I added it to my watchlist and I have since watched the short interest increase dramatically while the stock price has fallen. Earlier this month with BTH shares already trading at multi year lows, the company reported a major slowdown across its two largest divisions. Since that time, BTH shares have fallen 40% below those multi year lows and are now trading below $10 for only the second time in the last 20 years. Despite this selloff, the enormous short interest has continued to increase, so that as of August 15th there were 5,396,413 shares sold short. We should note here that BTH was still trading just under $11 when that August 15 short interest measure was taken and yesterday's new 52 week low and multi-year low of $8.65 suggests to us that the short interest has likely increased substantially given the additional 20% decline in the shares since that measure was taken. Given that short sellers were likely part of the impetus that pushed the shares down another 20% since the 5.4m share short position was measured at the close of trading on August 15, it is very likely that the current short interest is now considerably higher than the 5.4m reported as of two weeks ago, meaning that we are getting close to a place where there will no longer be shares that can be sold short.
While I will not delve into the debate of whether or not multi-level marketing is the best long term strategy or the worst (each of those positions have been covered ad nauseum), I will note that most of the larger publicly traded MLM companies (USANA, Herbalife, Nuskin, etc.) have all been hitting new highs over the last few months and if considered as a group, it would have been one of the strongest performers this year. Despite the recognition many of the large publicly traded MLMs have received over the last few months, Blyth has continued to trade lower and we believe that the very large volume of short selling has played a significant role.
We now expect the large short position to result in the stock trading significantly higher. For the short sellers to make a profit, they must buy shares to lock in their gains just like an investor who buys a stock has to sell it to lock in his gains. When the stock trades so low that it is unlikely to fall further, the short sellers will begin to buy shares to lock in those gains. While we believe that many short sellers will now begin to buy to cover on their own volition, we see several potential catalysts that could cause the stock to catapult higher as shorts scramble to cover their position and a buying frenzy is caused by long term investors and traders seeking to add fuel to the fire of what could be an epic short squeeze. We believe the stock has now reached that "tipping point" and expect some or all of the following factors to cause many of the short sellers to buy shares soon and do so more hurriedly if not frantically -
1) The Dividend - The BTH board of directors declared a dividend of 10 cents and the stock goes ex dividend on September 27th, meaning anyone who owns the shares on Sept. 27 will get 10 cents for each share owned. This is a good incentive generally for investors to buy the stock (earning over 1% in just a few weeks time), but we think the bigger impact here will be for the short sellers. Those who still have outstanding short positions on September 27 will have to PAY 10 cents for each share sold short. All other things being equal, we would expect to see some short sellers choose to buy shares before Sept. 27 so they do not have to take cash out of their own pockets to pay this dividend. If they attempt to buy to cover even half the position prior to September 27, that would equate to a huge increase in buying pressure over such a brief time frame and that alone could push the shares substantially higher.
2)Stock Buyback - Blyth has bought back millions of shares of its stock over the last few years including purchases just a few months ago of over 500,000 shares at nearly double the current trading price. The company's current share repurchase authorization would allow it to take down another 1 million shares without a new board authorization. The company has enough cash in the bank to buy the entire 1 million shares without missing a beat, so we would not be surprised to see BTH making open market purchases of their own shares and we note that buying 1 million shares would reduce the public float to a level where very close to the entire public float would be sold short, meaning that there would be no more shares that could be sold short. We are not aware of a company that has its entire public float sold short in the history of the NYSE.
3)Potential for a LBO - given BTH management's history of reinvesting cash flow into buying back its own shares at much higher prices, we wonder if they might be making plans for either a leveraged buy out or a Dutch Auction to take down as many shares as they can while they can set a low price and still have it be a premium to the trading price. The company currently has enough cash to buy back the entire public float at a double digit premium to the current trading price. Given the company's history of aggressively buying back its stock at average prices more 100% higher than the current trading price and the fact that it has previously used the "dutch auction" approach to repurchase its shares, it would not be that surprising to see the company come up with a creative way to take advantage of the very low trading price for its stock.
4) Trader Pile On - there are legions of short term traders who are combing charts, message boards, social media, etc. looking for situations like this, where some anomaly will allow them to make an easy double digit return in a very short time frame. Given the current short interest situation, the cash on hand, etc., it is likely that any shift in momentum will attract traders to this story and their piling in would have a similar effect to what we saw with traders piling in on the short side on the way down. The big difference (as William Ackman is learning the hard way) is that shorts can only hope to earn the return on their cost of capital that is earned in a decline, with the best possible return if it falls to zero. However, their loss potential is unlimited - thus, they can quickly have losses of greater than 100% (see Ackman) if momentum starts to shift the other way. This is why we often see such exaggerated moves higher when the momentum does shift, as the biggest impetus for the move higher comes as shorts scramble to buy to cover and push the stock higher. We would not be surprised at all to see Blyth shares start to show up on the radar for short term traders looking to pile on and make a quick buck.
5) Sales Reps / Promoters Start to Buy In - if the company's representatives decided collectively that they were tired of the company getting beaten up in the marketplace due to the constant negativity of the stock price hitting new lows and/or they were able to see (like Herbalife's reps) that the stock has traded down to a level that might allow them to make as much or more money investing in the stock as they can make selling the product. While those who bought Herbalife shares a few months ago may have already doubled their money, Blyth shares purchased at today's prices could move 200 - 300% higher if the majority of Visalus and Partylite promoters invested in a few shares each. In fact, if just the Visalus reps who signed up for the Visalus Twitter feed (57,856) each bought just 100 shares of BTH and immediately put in a sell order at $20 or $30, the stock would have the potential of reach those levels in a fairly short time frame due to the short squeeze it would cause. The buying of 100 shares by the Twitter followers would equal 5.7 million shares purchased and putting in the sell order at the higher price would make those shares "unavailable for hypothecation", which means they could not be borrowed against for a short sale. While we recognize that it is unlikely that all 57,000 reps are going to participate in something like this, we also recognize that it would not be that surprising if a significant number of them did and we believe that 200-300% run up in the stock price could occur if even a smaller percentage of promoters bought the shares because of #4 above - we would expect many traders to see that happening and pile on to participate in the easy upside. We believe this occurred to some degree with Herbalife, but note that the impact BTH promoters could have would be much larger due to the significantly smaller number of BTH shares that are available.
The bottom line here is there is a company that is producing over $200m in revenue per quarter, expects to earn at least $12 million this year, has a current dividend yield of 2.3%, insiders own over 51% of the stock and institutions like Blackrock, Vanguard, Fidelity and Wells Fargo own the majority of the remaining shares. Speculators have sold nearly 5.4 million shares short and they have been right in betting that the stock would go down, but its all on paper until they buy to cover. For all of the reasons stated above, we believe that short sellers are about to be battling each other to buy shares of BTH, not to mention company insiders, the BTH board of directors, long term investors, traders looking for easy gains and maybe even a significant number of Visalus and Partylite promoters. The demand caused by so many buyers vs. the limited supply of shares will result in a huge imbalance that could cause one of the greatest short squeezes in the history of the NYSE. Even if that does not materialize, we believe investors in BTH shares at these prices will make an easy double digit return on their money within weeks and if the short squeeze does materialize, the gains could be vastly greater.