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YRCW -- Shorting Into Strength Leads To Short Covering Rallies

|Includes: YRC Worldwide, Inc. (YRCW)

To prevent naked short selling, brokers are required to report to NASDAQ and the Exchanges their daily identifiable short sales volume. The data is assembled and posted a little after 4 PM everyday. is a website that reports "the aggregate volume traded on the NASDAQ, NYSE and OTC that has been reported to FINRA Trade Reporting Facility".

On Wednesday, June 18, 2014, about 330,000 shares were sold short out of the 1,200,000 shares traded as YRCW moved between 23.80 and 25.66, and closed at 25.35

Why would speculators add to their short position as a stock is going up? Isn't that adding to a losing position? Yes, it is adding to a losing position, but speculators who do so expect to come out well ahead.

Well capitalized short sellers usually handle a position that has turned against them by ADDING to their short, not covering their short, especially when the short position has been established on the basis of irrefutable logic; like a turnaround situation that has more than TRIPLED the shares outstanding. If everything else stays the same, when a firm triples its shares outstanding, the price should fall by two-thirds, 2/3. In 2013, when speculators shorted YRCW, there were only 10 million shares outstanding, but now there are 31.27 million shares outstanding. The market cap has risen from $70 million to about $800 million. Short sellers expect YRCW to fall back down, so they add to their position as YRCW goes up.

Nearly every quarter for the past five years, YRCW has reported a negative earnings surprise, with the exception of the first and second quarters of 2013. There have been NO net earnings AFTER taxes, depreciation, and interest. Short Sellers are expecting more of the same when YRCW reports on the 2nd Q of 2014 on July 30.

Across the board, freight demand is up, freight prices are up, and most transportation firms are reporting higher sales for April, May, and June so far. While it is very possible for YRCW to be a net purchaser of transportation at very high rates in the second quarter to make good on delivery guarantees, like YRCW had to do in the first quarter because of the snow and bad weather, that does not appear likely. At the same time, total debt has been reduced by over 200 million and the interest rate charged has been reduced by over 3%, so sell side analysts at brokerage firms expect YRCW to have earnings of 4 cents a share or more.

Short Sellers expect another negative earnings surprise, like YRCW has produced over and over and over again. Net earnings, and perhaps even a POSITIVE earnings surprise would force the shorts to seriously reconsider adding on to what USED TO BE a SURE THING and create a strong short covering rally up to, at the least, the high of last year at $36.99

Disclosure: The author is long YRCW.