Retail Outperformer Ripe for a Short Squeeze

Subscribers to Chart of the Week received this commentary on Sunday, March 24.

As the first-quarter earnings season wraps up, we’ve been left with a myriad of mixed post-earnings reactions from the retail sector, most of which shared holiday sales numbers. There was no shortage of outperformers, with the likes of Costco (COST), Kroger (KR), Burlington Stores (BURL), Dillard’s (DDS), Lowe’s (LOW), Macy’s (M), and Abercrombie and Fitch (ANF) among those that managed a positive earnings surprise.

Abercrombie has been reaping the benefits of its semi-recent rebranding, now up more than 18 times its April 2020 record low of $7.42. This sharp upward trajectory has been accompanied by the 30-day moving average, which also captured the shares’ pullback following a March 5 record peak of $140.28. The equity now sports a 453% year-over-year gain and has turned in only one weekly loss in 2024.

Despite this extreme outperformance, short sellers have been piling on, with the 5.71 million shares accounting for a whopping 11.6% of the stock’s total available float, with a short interest ratio of 3.48. Per Schaeffer’s Senior Quantitative Analyst Rocky White, ANF bearish bettors might be on the cusp of a big loss and ready to cover, subsequently triggering a short squeeze.

To estimate the return for the shorts, White went back over the past year of short interest reports to find when the shorts were added. Then he used the average price over the prior two weeks and estimated the average price the shorts were added at. Taking the weighted average by increase in shares sold short found the average price the shorts are in at.

White calculated the return the shorts are at, providing a list of stocks where significant shorts have been added and could be at a big loss. Sitting near the top of this list is Abercrombie and Fitch stock. While this data is a rough estimate, it shows ANF with a short interest change of 42% over the last two years, averaging a price of $40.30, with a -65% return. To say this steep, negative short interest return is ripe for a squeeze would be quite the understatement. If these shorts begin to bail out, we could see an even further surge up the charts for Abercrombie and Fitch shares.

It's amazing what a little rebrand will do to share price. Abercrombie was voted America’s most hated retailer in 2016 per the American Customer Satisfaction Index. Once the glossy, American-Prep It brand of the late 90s and early 2000s, five years ago the retailer’s executives pivoted to follow the generation it once captivated. The lesson here to savvy investors is to always keep an eye on rebrands and dramatic marketing shifts, because they could be foretelling massive investing opportunities.