Institutional investors remain overweight US Retail ahead of earnings

Pity the company executive reporting solid earnings against a backdrop of financial market meltdown. In the U.S. this week, it is the turn of the retailers to update the market. We use securities lending flow to assess both long and short investor sentiment in The Gap, Inc. (NYSE:GPS), Abercrombie & Fitch (NYSE:ANF), GameStop Corp (NYSE:GME), Children’s Place Retail Stores, Inc. (NASDAQ:PLCE) and Saks, Inc. (NYSE:SKS).

Long only investors who lend their shares own an average of 25% of the Russell 3,000 retailers, slightly above the average across the index at just over 23%. However, short interest amongst retailers within the Russell 3,000 is above average at 7%.

Long only funds who lend their shares in The Gap, Inc. are underweight the average for the sector with holdings of only 17% of the total shares. This represents an annual low as these institutional investors have reduced their exposure by 30% since the end of February. Short interest peaked at an annual high of 8% of total shares in early July, although shorts have since covered to 5% as the share price slumped in August. Demand to borrow the shares could be inflated by the convertible bonds in issue.

Institutional investors have increased their holdings in college students’ favourite, Abercrombie & Fitch by 25% this year raising their total stake to above the sector average at 26%. Short interest is at an annual low at just over 2% of the total shares, having fallen dramatically in the second half of last year from an annual high of almost 16% last August.

GameStop Corp continues to retain its top position as the most shorted stock in the Russell 3000. The company has appeared regularly on our screen of companies seeing a fresh annual high in short interest, which peaked in May, at 33% of the total shares. Shorts covered prematurely reducing their positions to 24% by mid-July before building again to 28% in August. However, institutional investors who lend their shares are overweight and still own an impressive 40% of company, despite having reduced their holdings by 20% earlier this year.

The share price of Children’s Place Retail Stores, Inc. has performed well since 2010, maintaining a threshold of USD 40 and during this time, short interest has remained flat at an average of 8% of total shares outstanding until March, whereupon borrowed stock trebled to 20% of the total shares. Meanwhile, institutional investors have taken a bullish position in the stock, increasing holdings by a fifth since the start of the year to 21% of total shares.

Saks, Inc. has beat its earnings estimates for the last four consecutive quarters and will no doubt be aiming to report the same on Tuesday. The once heavily shorted stock with more than three quarters of its lendable supply on loan has seen consistent short covering since May 2010 when short interest peaked at 33%. Short interest dipped to an annual low of 15% by June but has risen to 18% of total shares. Institutional investors have been less forgiving, having reduced holdings by 20% over the year but still own an impressive 27% of the company. The stock still has convertible bonds in issue which inflates demand to borrow the shares.