Corus Bancshares Shorts Could Be In For Trouble

I have been following Corus Bancshares (CORS) for several months, and the behavior of this stock price perplexes me. As has already been pointed out in other articles on Seeking Alpha, shares of Corus are trading at very low multiples and just above book value.

Back in March, Corus took an impairment charge for its holdings in Freemont General (FMT). Reading through the 8-K they filed for this, I notice they state:

Corus anticipates recording an “Other-Than-Temporary” impairment charge at the end of the first quarter of 2007 equal to the difference between Corus’ cost basis in the stock and the market value at March 31, 2007.”

If they did as they anticipated, they would have booked an impairment charge for 2.5 million shares at share price of $6.52/share, being the closing price for Freemont on March 31st, 2007. Corus stated their average cost was $12.73/share. Doing the math, that comes up to an impairment charge of $15.525m. With 52.5m shares outstanding, the charge would equal 27.6¢/share. On July 20th, 2007 Freemont’s stock closed at $10.33/share.

I realize Corus has not yet formally recognized the rebound in the Freemont shares; however, that rebound represents $9.525m or just under 17¢/share. If Corus booked the same impairment charge using the July 20th closing price of Freemont, they would have booked a charge of 10.6¢/share. I can’t see how the Freemont issue is depressing the price of Corus stock. Even if the Freemont shares became worthless tomorrow, that would only represent an additional impairment of 29¢/share.

What I do see is an enormous short interest in the stock. According to Yahoo, there were 18.14m shares short as of June 12th, 2007 representing 54.9% of the float. According to ShortSqueeze.com, those 18.14m shares now represent 94.98% of the float as of July 20th, 2007. I’m not sure how Yahoo or ShortSqueeze calculate float, but 18.14m shares does represent 32.25% of the 52.25m shares outstanding.

Given the performance of the Corus stock price, I would say the short sellers have done very well for themselves—on paper. Sooner or later, they are going to have to buy 32.25% of the Corus shares. I can see where selling this many shares short would depress the stock price. I can also see where the stock price will rise as this many shares have to be bought back to cover.

Unless the company goes out of business or there is some yet-to-be-disclosed disaster, I would say the people currently short are in for some trouble.

Disclosure: Author is long CORS