- Stock lending data for the third quarter indicates that institutional investors are shorting stocks as a hedge against market downturns.
- In the third quarter, AMC Entertainment was the fifth highest-earning stock for equity lenders.
- Borrow fees – which short sellers must pay to borrow shares of the stock they wish to bet against — are still very high for AMC.
Why Are Institutional Investors Increasing Short Positions?
The current bear market — compounded by high inflation and rising interest rates — has led many institutional investors to adopt strategies other than buy-and-hold investing.
An increase in stock lending in the third quarter (Q3) showed that these investors are leaning more heavily into short-selling stocks.
According to a report from DataLend, the global securities lending market generated $7.45 billion in Q3. That’s a year-over-year increase of 8%.
As the lending team at investment bank Brown Brothers Harriman (BBH) wrote, this year’s “untested and unfamiliar” macro environment has heightened investors’ focus on market fundamentals.
These investors have been increasing short positions in companies with negative earnings and overvalued fundamentals, using them as a hedge against market downturns.
As the BBH team wrote, “This generated some positive momentum creating a depth in the hard-to-borrow market in the U.S. Most notably, the demand concentrated on the “meme stocks,” such as AMC and GameStop, which continued to attract attention and command high fees.”
AMC Was Among the Top Five Equity Earners in Q3
According to the recent DataLend report, AMC Entertainment was the fifth highest-earning equity for stock lenders in the third quarter.
As the report pointed out, in Q3, the securities lending industry showed expressive revenue growth in the North American region (see the chart below). This was due to growth in several sectors, including consumer discretionary, communication services, and consumer staples.
Video game retailer GameStop (GME) – Get GameStop Corporation Report, considered the first meme stock, was the most stock for lenders in Q3, followed by Beyond Meat (BYND) – Get Beyond Meat Inc. Report, Lucid Group (LCID) – Get Lucid Group Inc. Report, and Sirius XM (SIRI) – Get Sirius XM Holdings Inc. Report. In fifth place, AMC Entertainment (AMC) – Get AMC Entertainment Holdings Inc. Class A Report rounded out the top five.
Because short sellers borrow stocks to bet against a certain company, we can conclude that the top five companies on the list are all targets of high short-selling activity.
These stocks have become short-selling targets because the macro scenario has hurt their business fundamentals. Except for Sirius XM, the five companies have reported negative earnings.
Short Sellers Are Willing to Pay High Fees to Short AMC
AMC Entertainment generated $2.63 for security lenders in the third quarter. About $1.3 billion came from North American equities — a 35% year-over-year increase. This was due to higher borrow fees. In the third quarter, borrow fee rates rose by an average of 37%.
Borrow fee rates are influenced mainly by the laws of demand and supply. When demand for a certain asset rises, generally, the fees get higher.
The latest data from Interactive Brokers shows that AMC’s borrow fees are very high — 18% annualized.
On average, AMC’s borrow fee rates stayed below 10% in July and August after a stock rally driven by earnings and CEO Adam Aron’s so-called “wen pounce.” This anticipated the creation of AMC Preferred Equity (APE) units.
After the APEs started to trade publicly, AMC’s borrow fee rates quickly climbed higher than 20%.
Meanwhile, APE units currently have a more modest borrow fee rate of 4.7% (see below).
I have warned in previous articles that high borrow fees require short sellers to have extra confidence that the stock will go down.
Despite a lot of skepticism regarding AMC’s fundamentals, there is a lot of risk in paying borrow fees close to 20% to bet against the movie theater chain. That’s especially the case because AMC has already fallen 83% from its peak in June 2021.
Considering the volatile nature of AMC — and the fact that a large part of its float is owned by retail investors — any further “meme” rallies would not be a surprise and could still be lethal for short sellers, considering high borrow fees.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Wall Street Memes)