Short Memories

The current coronavirus crisis has been seen as the reason behind significant increases in short positions in various industry sectors. The onset signaled the usual reaction from regulatory authorities around the world, particularly in Europe, to introduce short sale bans. While these bans have now been generally lifted, it is helpful to look to the past to see whether the current scenario is as dire as some think, and to understand whether there could be lessons to take away.

Let’s look at airlines. There are multiple negative stories around airlines naturally arising from the crisis along with speculation that some may not survive. The evidence of this is seen in the growth of shares shorted in the market. Considering Delta Airlines (DAL), for example, short interest seems to be about double today (about 22 million shares) vs. January. However, this is nowhere near the 45 million shares that were shorted in September 2013 nor anywhere near the level of 39 million shares shorted in March 2010. Should we therefore write off airlines as a whole?

Turning to the hotel and leisure industries. Eldorado Resorts (ERI) has about 32 million in short positions and whilst this is the highest (of any airline?) so far, there has been pressure on the stock as recently as July 2019 with 23 million shares shorted, and October 2018 with 15 million shares shorted. Is the current position attributable to the Coronavirus impact exclusively? Look at MGM Resorts International (MGM) with over $24 million shares shorted but, in March 2010, 45 million shares were shorted. Again, we must ask ourselves whether the current number is simply a blip.

Hertz (HTZ) has of course had some significant problems as the car rental business has collapsed in this crisis. The Avis Budget Group (CAR) have been suggested as being the next ‘target’ for shorting and indeed the numbers of shares thus sold has risen to 24 million, but this just happens to be about the same number as was shorted in June 2017. So, this is nothing new, right?

In short, despite the harbingers of doom, we may want to remember that the road over the last 15 years has been lined with many of the firms we see today being battered by the virus fallout having weathered previous storms; to emerge, if not unscathed, at least alive and kicking. Perhaps we should not be too quick to count out some of these industry icons!

Source: FIS Astec Analytics