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Short sellers bloodied as Target shares jump 20%

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Short sellers of shares in Target, the US retailer, suffered paper losses of almost half a billion dollars after the company’s better than expected sales and profit numbers sent the stock soaring to a record high.

Short bets against the retailer’s shares rose significantly over the past week ahead of the company’s latest earnings report, repeating a pattern that has emerged in the past several quarters, according to IHS Markit data.

Short selling involves borrowing shares in a company from an existing owner in order to sell the stock in anticipation it will fall.

Short interest accounted for 2.8 per cent of Target’s shares, or $1.2bn. on Tuesday, compared to 2 per cent, or $870m, at the start of the previous week.

The paper loss totalled $479m as Target shares closed on Wednesday up 20.6 per cent at $103.11, according to S3 Partners, an independent financial data provider.

“People have been bloodied on the bell,” said Ihor Dusaniwsky, head of predictive analytics for S3. “They may hope the price weakens in coming days to see if their short positions improve, instead of dropping their positions today.”

S3 also calculated that short sellers had lost $971m so far in 2019 on bets against Target shares. That ranks among the year’s most unsuccessful bearish positions, it said, though still far behind Alibaba, where short sellers have lost $6bn this year, and Apple, whose rising stock price has wiped $3.1bn from the portfolios of those betting against it.

The precipitous drop reveals the risky nature of short selling, which can lead to sizeable losses when stocks suddenly rise, even if an underlying bearish thesis is borne out over time — as the shift toward online shopping that has hit profits at brick and mortar retailers may still be.

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The losses were incurred by a broad group of short sellers including a sizeable portion of quantitative hedge funds that take out large short positions in companies in common stock indices, like the S&P 500, in which Target features.

“A lot of losses will be going into quant books, but a lot of equity long-short hedge funds are playing this name as well,” Mr Dusaniwsky said.

Target increased its profit forecast for the year to between $5.90 and $6.20 per share on Wednesday, from $5.75 and $6.05 previously, in part because of positive results from its expanded online shopping offering and same-day deliveries. Brian Cornell, chief executive, said the company had gone from “simply selling on a website to integrating digital within every part of our business, positioning our stores at the centre of the most comprehensive suite of digital fulfilment options in the US”.

“Brian Cornell is operating and executing at a very high level and is the best operator in the retail space right now and deserves 100 per cent of the credit for Target’s success,” said Marc Cohodes, a California-based short-seller who does not hold a short position in the company. “He took a lot of crap for a long time and now his efforts are being recognised in the marketplace.”

Via Financial Times

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