Under Armour And Visa Are Both King of the Shorts

(Bloomberg) -- Under Armour's stock gained more than tenfold over the past seven years and now, with the fitness-apparel brand facing stiffer competition than ever, it's only natural that the shares would attract short-sellers. In fact, as I pointed out in July, Under Armour has become this year's "most-shorted" member of the S&P 500 index.

However, a couple readers debated this superlative, suggesting that other companies such as credit-card giant Visa top the short-interest ranks. What gives? Do they just have a thing for Chef Curry sneakers? They might, but they also have a point.

It depends on how you measure short interest, which is to say it depends on how you perceive the risk. It's true that no company in the S&P 500 has a higher proportion of its shares outstanding involved in bearish bets than Under Armour, whose short interest stands at about 30 percent, according to Markit data as of this week. By comparison, Visa's short interest stands at less than 11 percent, and the average for the S&P 500 index is 2.8 percent.

Under Armour's shares have already fallen 9 percent from six months ago. Those still short the stock think the price has further to drop (or may be hedging a long position), but to get in now could be risky considering most analysts see the stock recovering from here. Some see its recent partnership with Kohl's as a positive that will boost loyalty among suburban, middle-class consumers -- particularly women -- as Under Armour tries to branch out beyond traditional sports stores.

Suppose sentiment continues to improve and the stock goes on a tear. What if short-sellers decided en masse to close out their positions by buying back the stock? Interestingly, it would take a lot less time for them to unwind their bearish trades in Under Armour than for a less-shorted company such as Visa. The difference is liquidity. 

While a lot of bearish investors have piled into Under Armour, the stock is relatively more liquid: Fifty-six million of its shares are sold short, which is 14 times its average trading volume -- implying a two-week hypothetical squeeze. Visa's 200 million shorted shares are about 29 times the stock's average daily trading volume of roughly 7 million during the past month. This implies that if Visa's stock were to suddenly pop following some good news, it could take around 29 days -- nearly a month -- for short-sellers to completely close out their positions. That would be one long short squeeze. 

Even more interesting is a situation such as Transocean, the owner of offshore rigs. Its short interest appears high at about 23 percent of shares outstanding, but if all those bears were to run for the hills and have to buy back that borrowed stock, it might take less than a week. Again, this is all hypothetical.

In the end, either measure is fine. But looking at the days-to-cover ratio can paint a very different picture of which stocks are the riskiest to short.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Under Armour's recent stock split may be another factor contributing to its short interest as traders bet on a narrowing of the price spread that exists between the two classes of shares.

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