Do Dillards' 'Ghost Shares' Spell A Short Squeeze?

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 |  About: Dillard's Inc. (DDS), Includes: ADS, SKUL
by: Tom Payne

The Myth

While researching the relationship of large short positions and price appreciation of stocks in the current bull markets, I discovered an amazing (no, astounding) fact. I was always under the naive belief that in order to short a stock, one had to borrow some unencumbered shares. I should have realized that a Wall Street capable of creating synthetic derivatives on mortgages would figure out how to create "ghost shares" that allow professional shorts to bend the rules.

I have no idea if this is legal, but a stock's short position can't be just 24% while Institutions and Insiders hold 145% of the outstanding shares. Can it? Where exactly are the missing 21% of the outstanding shares? This doesn't take into account any individual shareholders. I am writing about Dillards (NYSE:DDS) because I see a possible short squeeze developing. Until someone can find those shares, I don't see how this apparent undisclosed short position will ever get covered. While I found a list of approximately 20 other stocks with ghost shares outstanding, Dillards by far seemed one of the most egregious.

Myth Buster

Dillards is a well run company experiencing quite good eearnings momentum. While the single analyst following Dillards has a hold on the stock, it is not due to disappointment. While JPMorgan (NYSE:JPM) is calling for a $55 price target, the stock currently trades at $63. It is obvious that the huge short position has helped propel the stock price of DDS from $34 to $63 since February. In what many analysts are predicting will be a weak retail sector, a potential short squeeze could make DDS the bright star of the sector.

The Facts

  • Dillards has 45.4 million shares outstanding. Institutions own 49.4 million shares. Insiders own approximately 18 million shares and there is a short position of 7.2 million shares, leaving this 7 million share mystery.
  • Institutions own 178% of the float.
  • Dillards had revenues of $6.3 billion with earnings of $8.52 per share. The operational earnings were actually $4.21 a share when you deduct the special one time events.
  • The company has approved a $250 million share repurchase program, which they repurchased $98 million in the in the forth quarter.
  • More information on DDS.

Two More Stocks With Mystery Shares and Short Squeeze Candidates

Another stock where a short squeeze could develop is Advanced Data Systems (ADS).

  • ADS has 50 million shares outstanding, institutions own 65.8 million shares and the insiders own 1.5 million snares. There is a declared short position of 9 million leaving 8.8 million unaccounted for, or ghost shares.
  • ADS had sales $1.96 billion in 2009, $2.79 billion in 2010, and $3.17 billion in 2011.
  • ADS had earnings $2.49 per share in 2009, $3.48 per share in 2010, and $5.45 per share in 2011. They are projected to have earnings of $8.01 per share in 2012.
  • More information on ADS.

Lastly, here are the reasons why Skullcandy (SKUL) is a short squeeze candidate.

  • Skullcandy has 27 million shares outstanding, of which there are 8.7 million shares short. Institutions own 13.3 million shares, and major holders (Form 3 and Form 4 filers) own 10.2 million shares. This adds up to 34.2 million shares, 7.2 million shares more than what is currently outstanding. The short interest is approximately 85% of the float.
  • The last three years revenues were $118 million, $160.5 million, $232.4 million, and projected revenues for 2012 are $280 million.
  • Earnings were $1.00 per share in 2011 and are projected between $1.15 and $1.20 a share in 2012. Earnings are projected at $1.43 in 2013.
  • Total institutional holdings increased by 2 million shares last reported quarter.
  • For more Information on SKUL.

Where is the regulation of the Shorts

Abusive short selling is rampant in the markets today. I find it amazing that if you buy 5% of a company you must disclose it, but you can short as much as you want. There are no filing requirements required on short positions. Now it turns out the rule about borrowing shares in order to short shares, appears to be a fairy tail. It seems that the only way to regulate the excessive shorting in the markets is to cher when they lose money, trying to cover these ridiculous positions.

Disclosure: I am long SKUL.