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After Bed Bath & Beyond (NASDAQ:BBBY) shares jumped over 68% in Wednesday’s session, S3 Partners Research analysts said in a note that if the stock continues to rally, we could see some near-term short-sellers exit their positions and start to realize the profits they earned in 2022.
However, the analysts warned that the crucial difference between BBBY and other crowded shorts is that there is a definite threat of bankruptcy.
This “could embolden shorts to hold onto their positions, incur some temporary losses, and wait out this rally in anticipation of a $0.00 stock price in bankruptcy,” they added.
“BBBY short interest is $82.7 million, 39.93 million shares shorted, 52.07% SI % Float,” wrote the analysts. “Short selling activity could have been much larger, but lack of stock loan supply has limited the ability to get short locates and stock borrows to settle new short trades. We are seeing 99% of the stock loan pool already taken down and less than half a million shares left to borrow, at rates over 40% fee.”
The analysts explain that BBBY has become less institutional and more retail on the long side, with large institutional activity on the short side, making for a volatile stock as fundamentals are not the primary driver of price moves.
As a result, they said the stock is becoming much more of a momentum and technical name. They went on to state that if the threat of bankruptcy becomes more of a certainty, the prospect of a BBBY short squeeze becomes less and less, while if a bankruptcy is not in BBBY’s future, its rallying stock price will force a massive short squeeze and short sellers will “rush to the doors” to retain some of the mark-to-market profits they earned in 2022.
BBBY shares have rallied a further 16% Thursday.
