Western Union (NYSE:WU) has that unmistakable smell of a stock that is highly engineered, yet ready to collapse under any signs of strain. About 12% of the float comprises deeply entrenched short-sellers, and anyone who isn't shorting appears to only be holding on either because they're indexed, or because of the dividend checks and share buybacks.
To make the investment seem even shallower, IR presentations (here's one) do nothing to suppress the vague notion that Western Union is some kind of mystical high-yield money market account or omnipresent global tollbooth, extracting rents from people who "move money."
Combine these stabilizing and destabilizing factors with a choleric stock chart and then the prestige of being among the S&P 500 and WU is a very odd stock, seemingly at war with itself. We would call it...
Which is, more or less, a virtue in the types of stocks that we look to short. But we've already mentioned - as have other contributors (recent ones here and here) - that WU investors' love is bought, not earned. Do you really want to short a stock that's, by hook or by crook, returning cash to shareholders?
WU Shares Outstanding data by YCharts
Roughly 2/3 of WU's cash goes back to investors in dividends and share repurchases. So despite being tightly wound and (perhaps) fighting obsolescence, this is still difficult to short. It is - we would wager - deliberately designed to be hard to short.
This has not, however, deterred $1.2 billion of investment dollars from betting on WU's failure, and so we surmise that there is some non-trivial interest in shorting the stock. This article's message is, primarily, for those brave (?) souls and other would-be shorts.
(Aside: If you're reading this and saying, "Wait, I'm long WU," then we recommend you get acquainted with fellow-contributor David Pinsen's Portfolio Armor. Hedging is a virtue.)
So anyway, here's the message, loud and clear:
If you're inclined to short, short now.
Three factors are combining to make $20 a likely near-term ceiling for WU:
1. Technicals: Love it or hate it, people take trendlines and all that stuff seriously. Being that this is what WU's chart looks like right now, there's reason to call $20 a "resistance" price, or a "top."
(Regards to finviz.)
What's more, $22 is the highest the stock has traded since 2008, so the next big emotional chart-ceiling (or whatever you want to call it) is not far away.
2. Options: Looking at the derivatives market is a great way to get a sense for what smart-money investors are and aren't worried about. With WU earnings scheduled for May 3rd, we can look at the May expiration contracts to see those patterns in sharp relief.
Three strike prices immediately stand out.
On the put side, 3,516 contracts are open at the $18 strike, which implies a large insurance liability only after a >10% drop in share price. Another 6,820 contracts were bought at the $16 strike, insuring 682,000 shares against a crippling >20% drop (check this all out on Yahoo!).
Even more interesting, we think, is the call side, where 3,446 $20-strike calls were transacted. Like the aforementioned volumes, this size implies not speculative interest but hedging. As such, these call volumes are probably indicative of a large, recent, partially-hedged short position. Which leads us to...
3. Dark pool short selling: Our perennial favorite indicator, dark pool volume, tells us in no uncertain terms that someone has indeed been shorting WU.
(Chart from sqzme.co: Red bars are dark pool short volume.)
It is extremely unusual to see about half of a day's volume in an S&P stock composed of dark pool short selling, yet that's exactly what we saw in WU on Friday.
Between Thursday and Friday alone, over 4.5 million shares ($90 million) were sold short.
So if you're inclined to trust people who "put their money where their mouths are," give some credence to the WU short thesis at $20. And if you're thinking about adding this to your short book, consider now a good time.
Even if you're not inclined to short stock, we want you to make sure you know what the smart-money short sellers are thinking - ignoring them can be a very costly mistake.
As always, drop us a line in the comments, check out our platform, and be sure to follow along.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.