Shorts net unlikely payday from Whole Food deal
27 June 2017
The fallout from the Whole Foods/Amazon takeover has compensated for any immediate pain felt by short sellers. IHS Markit analyst Simon Colvin reports
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Over the past few years, Whole Foods has been a prime target for short sellers. With 16 June’s announcement that the company will be taken over by Amazon, observers anticipated an unmitigated disaster for short sellers. Although the deal inflicted a paper loss of $180 million for short sellers, its impact on a traditionally shorted section of the market more than offset the immediate losses. In fact the short profit and loss for North American food and staples—based on the short positions of night of 15 June—generated a $100 million profit at 16 June’s close.
This offset was driven by the rout experienced in the wider North American food and staples sector as the market digested the disruptive potential of the sector’s new well-capitalised interloper. In fact, these losses largely represented more than 4 percent of the sector’s entire market cap, which indicates more turbulent times for the sector.
Warehouse retailer Costco was the chief source of solace for short sellers on 16 June, returning more than $68 million as its shares fell by more than 7 percent. With only 1.2 percent of shares outstanding on loan, Costco was not a high conviction short target, yet its large size and the sharp fall in its share price, made sure that the company offset about half of the pain felt by short sellers from the Whole Foods deal.
Short sellers were much better positioned to profit from the 18 percent share price decline of fellow warehouse store operator Smart & Final. They had positions worth 7.6 percent of the company’s outstanding shares. Smart & Final’s shorts only netted $12 million on the day, however, due to the firm’s relatively small size.
Whole Foods competitor United Natural Foods was the most profitable on the list of high conviction short plays. The company has more than 10 percent of its shares out on loan, netting bearish investors $23 million from the retreat in its share price.
Interestingly, convenience store operator Casey’s General Stores, which is the most shorted North American grocer, saw its shares trade relatively flat on 16 June. This could be due to the fact that the market feels the convenience sector is relatively immune to online competition, or that its disappointing earnings have fairly valued the firm.
Could have been much worse for shorts
Short sellers may have Jana Partners to thank for their bumper payday. The activist investor firm started to agitate for Whole Foods to take a strategic initiative when it went public with a position in the grocer back in April. Short sellers have taken the threat of this change seriously, and they halved their positions in the ensuing weeks.
The 6 percent of Whole Foods shares that were out on loan on the morning of 16 June represent the lowest demand in more than 12 months. Short sellers would have faced $200 million of additional losses had they kept their positions at the same levels when Jana Partners first agitated for change.
This offset was driven by the rout experienced in the wider North American food and staples sector as the market digested the disruptive potential of the sector’s new well-capitalised interloper. In fact, these losses largely represented more than 4 percent of the sector’s entire market cap, which indicates more turbulent times for the sector.
Warehouse retailer Costco was the chief source of solace for short sellers on 16 June, returning more than $68 million as its shares fell by more than 7 percent. With only 1.2 percent of shares outstanding on loan, Costco was not a high conviction short target, yet its large size and the sharp fall in its share price, made sure that the company offset about half of the pain felt by short sellers from the Whole Foods deal.
Short sellers were much better positioned to profit from the 18 percent share price decline of fellow warehouse store operator Smart & Final. They had positions worth 7.6 percent of the company’s outstanding shares. Smart & Final’s shorts only netted $12 million on the day, however, due to the firm’s relatively small size.
Whole Foods competitor United Natural Foods was the most profitable on the list of high conviction short plays. The company has more than 10 percent of its shares out on loan, netting bearish investors $23 million from the retreat in its share price.
Interestingly, convenience store operator Casey’s General Stores, which is the most shorted North American grocer, saw its shares trade relatively flat on 16 June. This could be due to the fact that the market feels the convenience sector is relatively immune to online competition, or that its disappointing earnings have fairly valued the firm.
Could have been much worse for shorts
Short sellers may have Jana Partners to thank for their bumper payday. The activist investor firm started to agitate for Whole Foods to take a strategic initiative when it went public with a position in the grocer back in April. Short sellers have taken the threat of this change seriously, and they halved their positions in the ensuing weeks.
The 6 percent of Whole Foods shares that were out on loan on the morning of 16 June represent the lowest demand in more than 12 months. Short sellers would have faced $200 million of additional losses had they kept their positions at the same levels when Jana Partners first agitated for change.
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