Investors Short Big Retail

Among the many headwinds U.S. department stores are facing that make the possibility of a Merry Christmas seem unlikely, a new one has started blowing.

Investors, it seems, are increasingly betting against the retail sector ahead of the big shopping season on the assumption that U.S. consumers will continue to skip the mall in favor of shopping online. Short-selling in the retail sector has hit a two-year high — jumping 17 percent last month alone, according to IHS Markit.

Some retailers have been hit harder than others. Macy’s is particularly beloved by the shorts, who now hold 17 percent of the firm’s underlying shares — a 40 percent month-on-month uptick. Nordstrom is trailing not too behind with 12 percent short interest; Kohl’s has 11 percent, and Target’s shorts are holding 6 percent.

Taken as a whole, 5.6 percent of shares outstanding on the S&P 500 retail were on loan to short-sellers by the end of last week. The benchmark for the S&P 500 index was 2.7 percent.

“This is one of the easier trades you put on around the holidays,” Nicholas Colas, co-founder of DataTrek, an investment newsletter, told The Financial Times. “You short retail before the holidays because invariably the reality never lives up to the hype.”

He further noted that online is pushing a lot of additional concern in the segment this year.

“It does seem like investors and traders are shorting retail because they feel Amazon and other online retailers will have a great year and take more share away from brick-and-mortar retail.”

Short interest in Amazon is low — about 0.14 percent of its float.

“No one has yet proven that they can withstand the Amazon onslaught, particularly over Black Friday,” says Joel Bines, director at AlixPartners, a consultancy.

But retail’s struggles do not necessarily mean that shorting is low-risk — or even always wise. Retail is volatile when it comes to share price these days, and even small positive surprises can lead to stock jumps. Last week, noted the FT, Abercrombie & Fitch and Foot Locker jumped more than 20 percent in a matter of minutes.

“Retailers have done a very good job of lowering expectations dramatically,” said Bines. “Even the slightest beat can result in a giant increase in market value on a percentage basis.”


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