Why Short Selling Is A Dangerous Game: Sears

Sears Holdings Corp SHLD investors awoke this morning to spectacular news that the company has secured an additional $140 million in credit and will be undergoing a radical restructuring that will include cost savings of at least $1 billion. The news sent Sears shares soaring nearly 40 percent on the market open on Friday, hammering short sellers for huge losses.

Shorts Were 'Wrong'

So, what did Sears short sellers get wrong about the company? Maybe nothing at all. The restructuring news may help Sears stave off bankruptcy in the short-term, but the new plan is just the latest in a series of Hail Mary plans that Sears has come up with to keep its head above water.

Cost savings and access to capital are great, but they won’t fix what’s wrong with Sears. Revenue is down 55 percent in the past decade and the company reported its third consecutive $1 billion annual loss in 2016.

Frustrated short sellers know that a Sears turnaround story is about as likely as an escape from Alcatraz at this point, yet they were the ones that ended up big losers on Friday’s news.

Back in December, Benzinga reported on the dangers associated with short selling Sears stock. The potential for huge short-term gains in Sears has much less to do with the company’s long-term viability than it does to do with its massive short interest and extremely low market expectations.

And Now

According to shortsqueeze.com, Sears currently has a huge short percent of float of 71.3 percent. That eye-popping number is likely the biggest reason for Sears’ major Friday move. Any time Sears sells assets, gets another loan, is the subject of buyout rumors or delivers even the slightest earnings beat, any positive market reaction has the potential to snowball into the type of huge short squeeze the stock endured in early Friday trading.

Shorting struggling stocks like Sears may seem like a no-brainer to inexperienced traders, but it is also an extremely dangerous short-term bet with limited upside and huge potential downside. Even after Fridays move, short sellers that opened a trade in December are still profitable, but timing the volatile moves associated with short squeezes can be nearly impossible.