Richard Pearson / MoxReports Is Very Long On Dillard’s, Inc. (DDS). Sees Massive “Infinity Squeeze”

Richard Pearson / MoxReports Is Very Long On Dillard’s, Inc. (DDS). Sees Massive “Infinity Squeeze”
See page for author [Public domain], via Wikimedia Commons

This is pretty intense. 

Please read and understand what this means !!

Get The Full Warren Buffett Series in PDF

Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

John Rogers Says Contrarian Investing Gives You The Confidence To Buy When Others Are Selling

Exclusive: Lee Ainslie Struggled During The Third Quarter As Tech Holdings Fell

activist short selling Investing investLee Ainslie's Maverick Capital had a difficult third quarter, although many hedge funds did. The quarter ended with the S&P 500's worst month since the beginning of the COVID pandemic. Q3 2021 hedge fund letters, conferences and more Maverick fund returns Maverick USA was down 11.6% for the third quarter, bringing its year-to-date return to Read More

Dillard's could be setting up for a massive "infinity squeeze" similar to Volkswagen in 2008 and KBIO in 2015.

Each of those stocks soared by hundreds or thousands of percent within just a few days as a result of hedge funds being short more shares than were in the effective float.  It was a simple mathematical imbalance which is what we are now seeing at Dillard's.

Bloomberg is now showing that short interest at Dillard's (DDS) has spiked to 69.9% of float. But it is actually much worse than that.

There are millions more shares short at Dillard's than there are in the effective float that can be readily bought back from ready sellers.

How did this happen ?

In January, short interest was just 20% of float. No big deal.

But many funds have been steadily increasing their very generic bets against all department stores.

They did not notice that as shares short increased, Dillard's was aggressively buying back stock.

There are now 9 million shares short, but only 12.88 million in the stated float, according to Bloomberg.

Other sites (especially free sites) have failed to update the float for the 3 million shares bought back in 1H 2017. So many investors are still not aware of just how high the short interest has become.

But it is much worse. Similar to the VW squeeze in 2008 which rose 5x in 2 days, index funds are typically unable to sell at will in meaningful size.  Index funds must continue to hold in proportion to their benchmark index.  Index funds hold as much as 6 million shares of Dillard's which they are mostly unable to sell.

In addition, David Einhorn's Greenlight Capital now owns 9.9% of Dillard's (2.5 million shares). Einhorn was on the painful side of the VW infinity squeeze in 2008, so he no doubt appreciates the exact short vs. float that is now rapidly unfolding.  He has zero reason to sell just to alleviate a squeeze.

Once we know that index funds and Einhorn either can't or won't sell, there are as few as 4.38 million shares in the effective float, but still 9 million shares short which now need to be bought back.

And then it gets worse.....Dillard's has been aggressively buying back stock in each of the past 6 quarters.  The buybacks have been accelerating sharply as the share price got lower. In Q1, Dillard's bought back 1.7 million shares.  But in just the month of May, Dillard's accelerated this to 1.3 million shares in just a single month.  During Q2, the stock was hovering near 5 year lows, suggesting that Dillard's likely continued its aggressive repurchase.

Dillard's will announce Q2 results and the amount of additional shares repurchased on August 10th (just 2 weeks). I am expecting that Dillard's will announce the further repurchase of 1-2 million shares across June-July.  This would reduce the effective float to just 2-3 million shares which are likely to be readily available for those 9 million shares short to cover !

The biggest risk here is the someone (could be Einhorn or any outside 3rd party) will simply decide to recall any shares they may have lent out, which could potentially trigger an immediate buy in of millions of shares at a time when there are not enough shares readily available. This is exactly what Martin Shkreli did with KBIO in 2015, causing a squeeze that sent that stock up by thousands of percent within just a few days.  (That was the trade where one retail trader ended up starting a go fund me account because he ended up deep in debt to Etrade when his short losses amounted to 400% of his initial account value).

Article by Richard Pearson

Updated on

No posts to display