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RH: The Perils Of A Crowded Short

Jul. 13, 2017 1:51 PM ETRH (RH)GNC, URBN, WSM17 Comments


  • Despite a well argued short thesis, the Masters of the Universe have lost money shorting RH.
  • A very high short interest, combined with strong institutional ownership/support and share buybacks, has goosed shares of RH.
  • RH is a dangerous short.

Please note: this piece was originally published on July 11, 2017 at 6:20 AM on my premium site, Market Adventures. On that morning, RH shares opened for trading at $61.25. I am sharing this piece on the public site as it should give the Masters of the Universe pause when it comes to shorting stock with highly elevates short interests as a percentage of their floats.

As I am very intrigued by high short interest shorts, measured as a percentage of their float, this morning, I write to discuss Restoration Hardware Inc. (NYSE:RH). SA Contributor, Ioannis Tsoutsias, CFA, wrote an interest piece on June 12, where he shared his short thesis. Generally speaking, I am a fan of Ioannis’s work as I find that it is logical and offers a nice blend of qualitative and quantitative analyses. However, I happen to disagree with this short due to the setup.

Incidentally, on June 12th, the day Ioannis’s report was published, shares of RH opened for trading at $50.53. Despite his well-argued and logical short thesis, if you had blindly followed Ioannis's short recommendation then, at least of through yesterday, you would have found yourself upside down 10 points if you had shorted it at the June 12th opening price.

For perspective, my article isn't an in-depth review of the merits of RH's business model nor I do I disagree with Mr. Tsoutsias's overall thesis, per se. Instead, my point is that I have no idea why the Masters of the Universe (MOTU) enter into these crowded short bets. The volatility in shares of RH is yet another case in point that it is simply too hard to be short any stock when the overall market is already super bearish towards the name.

If we look at the short interest data, the MOTU

This article was written by

Idea generation, value investing, small caps and under the radar stocks.
A career wanderer and journeyman, with a passion for deep value and contrarian investing. I spent five years on the buy side in investment grade bonds on a team that managed $50 billion of assets, 3.5 years as an energy credit analyst for an energy company, and had multiple stints in corporate finance, most recently as a strategic financial analyst. I have an undergraduate degree in Finance (UMass Amherst) and earned an MBA (Babson College).

I actively invest my own capital and for a few family members.

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Analyst’s Disclosure: I am/we are long GNC. 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.

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