Investors are lining up to bet that Israeli liner company Zim has further to fall, even after the stock price already has declined 73% from its record high in March.
Zim holder and “disgruntled investor” Ned Sherwood blames “the Reddit crowd” for much of the 12.41m shares held short, which equates to about 10.3% of the outfit’s 120m units outstanding and about 14.15% of shares circulated for trading.
Reddit is a social media site whose WallStreetBets group fuelled unnatural gains in some stocks, such as GameStop, but can encourage short positions in others. The Zim discussion forum currently lists more than 1,200 members.
The big short
Sherwood argues that the negative bets have exacerbated Zim’s already poor trading in that they create an artificial supply of Zim paper at the same time that demand is drying up amid investors fearing a global recession.
The numbers betting against Zim are significantly higher than the short positions in New York-listed container lessors.
For example, the percentage for Greece-based Danaos Corp is 3.5% of shares outstanding and just under 6% of the float, while for Costamare they are 2.2% and 5.25%. For Seaspan Corp parent Atlas, short positions are 1.46% of shares outstanding and 3.57% of the float.
The short numbers for Zim are clearly elevated, according to investor-researcher J Mintzmyer of Value Investor’s Edge. But he did not entirely agree with Sherwood’s take.
“The short count sounds about right and it’s far higher than anything else in shipping and most of the market,” Mintzmyer told TradeWinds.
“But I don’t agree with the ‘Reddit crowd’ assessment. It’s not a bunch of retail junkies shorting this one. It’s major global macro funds and quant funds and such.”
Whatever the source of the negative bets, Sherwood argued that the positions do not make a lot of sense given the roughly $3bn in cash — or close to $37.50 per share — sitting on Zim’s balance sheet.
“Would you short a stock with maybe $37 [per share] of cash on its balance sheet by September 30 when it’s trading at $25?” Sherwood asked.
In a recent client note, Jefferies analyst Omar Nokta said it would take two years of rock-bottom rates of $1,200 per teu for the operator to burn through its reserves.
However, the analyst did take down his $55 price target to $27 in acknowledgement of the weaker freight market ahead.
Sherwood noted that Zim faces greater operating risk than some of the container ship lessors, which have strong contracts in place with solid counterparties. But he also noted Zim management’s comments that it has the ability to extract itself from 62 leases over the next couple of years.
He advocates using the $1bn that Zim might otherwise pay out in a fourth-quarter dividend and directing it towards share buybacks that would close Zim’s trading gap to net asset value and could turbo-boost the stock as the shorts panic.
“There are 12m shares held short that would need to cover their positions and would go running for the hills,” Sherwood said. “Add that to up to 40m shares that theoretically could be taken back in — that’s a lot of demand.
“It would bode well for Zim for the future and those shareholders who stay the course. I plan on staying the course.”
