I have picked out 4 stocks that appear to be the poster child for rampant undocumented shorting.
In order to legally short a stock, you are supposed to borrow an unencumbered share of stock. I have no problem with the short sellers borrowing shares and initiating a short position in a stock, but when we get to a point that institutions own more shares than the outstanding shares of a company, I have to cry foul. Lack of regulation has created a market where institutional holdings in heavily shorted stocks are often more than 100% of the issued shares. In the companies mentioned below it appears that the short sellers have not borrowed the shares and declared the short position. Is the basic covenant that you must borrow a share of stock in order to short the stock a fairy tale? Abusive shorting has become a real problem in today's market and the more sunshine we can bring to this issue the more effective the markets will become.
Surprisingly many stocks survive the avalanche of shorting and today trade with extremely high PEG ratios. The initial short position in many of these stocks has propelled the share prices higher than the consensus share price estimated by Wall Street analysts. As long as a company continues to perform and make their numbers, Wall Street will find a reason to eventually raise the price per share estimates. When the professional shorts are trying to cover their position and institutions are also buying the shares, it results in a perpetual short squeeze. At some point there are no longer shares to borrow, yet somehow the shorts have figured out how to game the system.
The Perpetual Squeeze
Core Laboratories N.V. (CLB) was established in 1936 and is one of the world's leading providers of proprietary and patented reservoir description, production enhancement and reservoir management services to the oil and gas industry.
- CLB has 47.9 million shares outstanding. The institutional hold is 51 million shares and insiders own approximately 2 million shares. The declared short position is 4 million shares, indicating the undeclared short position is 1.1 million shares plus all the shares owned by individuals.
- To obtain more information on Core Laboratories N.V.
Allegiant Travel Company (ALGT) is a leisure travel company focused on providing travel services and products to residents of small, undeserved cities in the United States. The company is focused primarily on small markets.
- ALGT has 19 million shares outstanding. The institutional hold is 17.9 million shares and insiders own approximately 4.1 million shares. The declared short position is 2.9 million shares, indicating the undeclared short position is 0.1 million shares plus all the shares owned by individuals.
- To obtain more information on Allegiant Travel Company.
Althenahealth, Inc (ATHN) provides ongoing billing, clinical-related, and other services to medical group practices primarily in the US.
- ATHN has 36.4 million shares outstanding. The institutional hold is 46.9 million shares and insiders own approximately 0.7 million. The declared short position is 9.6 million shares, indicating the undeclared short position is 1.7 million shares plus all the shares owned by individuals.
- To obtain more information on Althenahealth, Inc,
Digital Reality Trust (DLR) owns, acquires, develop, redevelop and manage technology-related real estate. They target high-quality, strategically located properties containing applications and operations critical to the day-to-day operations of technology industry tenants and corporate enterprise data center users.
- DLR has 109.8 million shares outstanding. The institutional hold is 128.7 million shares and insiders own approximately 0.1 million. The declared short position is 11 million shares, indicating the undeclared short position is 8.2 million shares plus all the shares owned by individuals.
To obtain more information on Digital Rality Trust.
The number of actual shares in a Company, should be equal to the total outstanding shares, plus the declared short position. When you look at the chart you will see that Institutional holdings plus Major shareholdiers positions are greater than should be possible. This does not even include all of the shares owned by individuals and non reporting institutions.
|Total Institutional & Major Shareholdings||53.0||23.0||47.6||128.8|
|Declared Short Interest||4.0||2.9||9.6||10.8|
|Total Outstanding Shares Plus Short Interest||51.9||23||46||120.6|
|Undeclared Short position = 1st Total - 2nd Total plus all Individual Shareholders||1.1||0.1||1.7|
Utilizing the Opportunity
I look for promising early stage companies with earning momentum that have exceedingly high short interest, and incredible low PEG ratios. If these companies can continue to exceed expectations they will shortly reach this stage of perpetual squeeze and the low PEG ratio will become a extremely high PEG ratio. Skullcandy (SKUL) has the highest short interest on NASDAQ and is on the verge of reaching this perpetual squeeze state. Here are the reasons I believe Skullcandy will cross this threshold.
- 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.
- Skullcandy is followed by 8 analysts all having buy recommendations with a consensus price per share estimate of $22 and a high of $28
Abusive short selling is thriving in today's regulatory environment. It may be possible to develop an investment strategy around this abusive shorting. If you discover a heavily shorted stock early in the earning momentum phase, you are going to be handsomely rewarded.
CBL had 47.9 million shares outstanding according to the 3/30/2012 8k filling, and has not issued any more shares according to the SEC fillings. The short interest of 2.9 million shares was reported on 3/30/2012. The institutional holdings are from 4/20/2012 13G filings.
ATHN had 36.4 million shares according to 12/31/2011 10K and has not issued any more shares, according to the SEC fillings. The short interest of 9.6 million shares was reported on 3/30/2012. The Institution holdings are from 4/20/2012 13G filings. The reported institutional holdings have increased 349 thousand shares since the 12/30/2012 13G filings. These additional shares are included in my numbers.
ALGT had 19.1 shares outstanding according to the 12/31/2011 10K filing and has not issued any more according to the SEC filings. The short position of 2.9 million shares was reported on 3/30/2012. The Institution holdings are from 4/20/2012 13G fillings. The reported institutional holdings have increased 54 thousand shares since the 12/30/2012 13G filings. These additional shares are included in my numbers.
DLR had 107 million shares according to 12/31/2011 10K. They converted the Convertible Preferred C class shares into 2.8 million shares in April bringing the total shares to 109.8 million. They have issued the following: D,E,F series Convertible Preferred shares that DLR has the option to pay off or convert. The short interest of 11 million shares was reported on 3/30/2012. The reported institutional holdings have increased 594 thousand shares since the 12/30/2012 13G filings. These additional shares are included in my numbers.
The institutional hold in these stocks are based on 13G filings which pertain to institutions managing 100 million or more. To ascertain the true undeclared short position you would have to add all of the shares owned by individuals and any money managers not meeting the 100 million dollar threshold requiring a 13G filing.