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ITT Educational Services Inc. Message Board

  • tommy_proctor222 tommy_proctor222 May 14, 2012 1:31 PM Flag

    Short Squeeeeze

    Short position has been huge for many months. Despite buybacks and little overall downtick in the price, no short squeeze. At what point will these guys need to cover? What is it going to take to get a short squeeze going here so we can see some upside action?? Any bets on if and when this will happen? At some point, the short bashers will pay don't you think?


    Tommy Proctor

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    • Regarding short selling, the one thing I do not know is the following. If I borrow shares from someone and then sell those shares to another person, I am shorting the stock. I deliver the stock I borrowed to the new person who bought them from me. That new person has physical possession of the actual stock certificate. Now, let's say that new person has the stock certificate in his margin account, can this certificate be loaned out again? If it can, in effect 100 borrowed shares could turn into a huge number of shares shorted by simply repeating the process. I suspect that this practice is not possible as the loaned securities are tracked by cusip number and loaning out an asset multiple times does not sound right.

      In any event, will the ESI shorts ever be forced to cover based on a stock loan recall? Theoretically, this would begin to happen only when the the total shares outstanding (all of which had be loaned out) started to fall below the number of shares shorted. With 23 million shares outstanding and 9.8 million shorted, we are still far away from the theoretical forced short squeeze point. Theory aside, at what point do we get a forced short squeeze from a practical standpoint? I do not have the answer. I know that so far, even with the massive reduction in total ESI shares outstanding, we have not had forced short covering. However, ESI has retired 17 million shares over the past 3 years. If over the next three years ESI were to buyback another 10 million shares ($600 million, easily doable at the company's earnings levels), the share count would drop to 13 million against a 9.8 million short interest. This still does not trigger a theoretical short sale buyback, but I have to think that from a practical standpoint, the risks of a stock loan recall squeeze would rise exponentially over the course of those three years. If a stock loan recall driven short squeeze were to occur, the rise in ESI share price would be massive. All the longs would know that the shorts were trapped and would not sell their shares until the price had risen massively. Furthermore, every short term trader and profit hound would understand what was going on and would attempt to also buy ESI shares so as to sell them back to the shorts at much much higher prices. The result would be a bloodbath, as there would be so little stock left in the market due to the buybacks, so few sellers of those shares, so much demand from the short sellers and so much demand from the short term speculators working the short squeeze angle. Combine all of this for ESI with a price/earnings ration that is 4-5, if one strips out the cash on the balance sheet.

      As I see it, the shorts are trapped. Their only salvation is a complete implosion of ESI as a business. I just do not see the latter happening. The common and well worn mantra is that the government wants to put the for-profit education sector out of business. I personally think that this viewpoint has been overworked.

      Only time will resolve all of the above. I have no way to determine the end game. However, based on what I see, the risk to the short seller is rising geometrically every quarter.

    • I have often thought of the issue of a short squeeze as it applies to ESI. Clearly we have not had a major squeeze in which the shorts are force to cover their 9.8 million share position. There have been short bursts of short covering which are evidenced by ESI's share price making a modest (maybe $10 - $12)move upward. In the end, after any of these up moves, the short interest in the shares has not declined, so I have to say that these upward price moves have not been short covering of any consequence.

      With the company continuing to buy back stock as aggressively as I have ever seen any company do (the total shares outstanding down over the past three years from 40 million to 23 million), the dynamics of a "real life" squeeze is growing. I define a "real life" short squeeze as one where the shares shorted are actually "called in" by the margin clerks and the short covering is forced. This is different form short covering where the short sellers cover their positions for reasons other than a margin clerk calling in their stock. Right now, ESI shares are unborrowable as far as I can tell.

      From a theoretical standpoint, only the base of existing shares can be loaned out (23 million), although naked shorting (which is supposedly illegal now) can expand the theoretical number of shares sold short. Out of the current 23 million shares outstanding in ESI, all of these are probably not borrowable for shorting purposes. How much depends on in what types of accounts the shares are held. Given the massive short interest, it is safe to assume that the major institutional holders have all made their holding available to be loaned out to the short sellers. I find this amazing as all these institutions have to do is to take ESI shares off their "available for loan" lists and the shorts would have a hard time finding stock to borrow. Why they do not do this, I do not know.

      ...continued next post....

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