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Short bread? Potbelly, Einstein Noah among notable short-interest increases

The Exchange

Short sellers continue to press their case against two of last year's restaurant IPOs, with sandwich shop Potbelly (PBPB) in particular finding an increasing amount of doubters in the market.

According to data made available last week, Chicago-based Potbelly, public only since October, had the largest percentage of its shares sold short among more than 40 restaurants surveyed by Yahoo Finance. At 42.3% of its float, that was roughly five times the group average of 8%. Going back to Dec. 31, shorts have grown that position, now at its peak reading for the stock, by 56%.

To say Potbelly's five months on the market have been forgettable for longs is being charitable since its high of $33.90 in the days just after its IPO, which priced at $14, it's dropped 47%. And with a forward price-to-earnings ratio at 49.6, one of the highest in the group, it may well continue to draw in skeptics, despite its upbeat talk around earnings and restaurant counts.

For another new stock, Noodles & Co. (NDLS), cynicism hasn't reached quite that magnitude, but shorts are plenty interested. At the moment, they've got a position equivalent to 19.8% of the float in the Colorado-based pasta chain. Going back to the initial short interest report for Noodles in July, the position has climbed 167.5%. This year, it's up 5.9%.

Considering the glee with which new companies are often greeted, it's not entirely a surprise they'd be viewed as easy marks by some traders banking on their early, sometimes extraordinary, valuations to eventually subside. In general, data on short interest deserve watching because they provide an indication of large traders' views on which stocks may be overheated and due to fall. At the same time, sizable short positions can in fact push stocks higher as traders who are short purchase shares to close their positions. If this happens quickly or significantly, that demand can bolster a stock's price.

This perhaps has particular relevance for publicly traded restaurants because of their impressive rally. Along with the market, restaurants have risen each year since the 2008 downturn, outpacing the S&P 500 every time. However, in 2013 they gained 54%, about 25 percentage points better than the S&P, making for both a more pronounced lead than they normally record and their strongest year since 2009. Among 40 restaurant stocks that traded for the entire year, only three lost ground Ruby Tuesday (RT), Ignite Restaurant Group (IRG) and BJ's Restaurants (BJRI). For the first quarter that ended at the close of trading Monday, the restaurant stocks in the survey group added 0.8%, lagging the S&P's 1.3% upturn.

Room for more?

Compared with a year ago, 24 of the 42 stocks researched have had a short interest increase. From that perspective, shorts aren't necessarily punishing the group, considering only 57% of the total number have a bigger short than 12 months back. Still, because of the zeal with which shorts have gone after certain stocks, the average change for all companies is an 87.6% larger short. Of course, the market's record-setting ascent has made shorting a dangerous activity along the way, likely keeping some traders who'd prefer that route out of the way of the upside momentum.

In the first quarter of this year, short interest has increased in 32 of 42 names measured, led by Einstein Noah (BAGL), where it's more than tripled. Despite this, shorts aren't yet in tremendous supply, with their interest totaling only 1.5% of the float. Among all the stocks examined, the average short position has increased in size by 26.6% in the past three months.

Other notable short builds this year have occurred at Famous Dave's (DAVE), up 88.6% to 4.5% of the float. It's also seen one of the biggest increases since the short interest report at the end of February, with the position climbing 18.4%. All this has come as the barbeque seller was the leader of the restaurant group in the first quarter, rising 33.8% and adding to last year's 99.1% gain as activist investors got involved. The continuation has been influenced lately by its 2013 earnings growth and its naming of former McDonald's (MCD) executive Ed Rensi as interim CEO.

Elsewhere, Popeyes' (PLKI) short interest is up 83.3% this year, and at Sonic (SONC), it's up 76.3%. Last year, shares of Sonic surged 93.9%, while Popeyes (formerly AFC Enterprises), gained 47.3%. The five stocks with the most change in short interest in the first quarter are below. Yet even with their increases, all remain below the 8% group average for short percent of float.

Meanwhile, shorts have pared their positions substantially from the end of last year in Chipotle (CMG), Carrols Restaurant Group (TAST) and most of all Pizza Inn (PZZI). The latter name, one of 2013's strongest gainers with a 135% improvement, has seen its shares slide 25% since the start of this year. So if not for a certain degree of upward pressure from short covering, that might be even worse.

Compared with last year, the short position in Chipotle has dropped 65.3%, and in '14 alone, it's down 22.4%. It's also declined, year over year, more than 60% at Tim Hortons (THI), Buffalo Wild Wings (BWLD), DineEquity (DIN) and Biglari Holdings (BH).

For about three-quarters of the stocks, their current short position is under the high point of the past year, but, along with Potbelly, nine others were at their apex as of the March 14 report, including several highlighted here: Famous Dave's, Del Frisco's (DFRG), Chuy's (CHUY), Ignite, Sonic, Popeyes, Einstein Noah, Bob Evans (BOBE) and Cracker Barrel (CBRL).