Summary
Here's why short sellers of Zale stock may be the only winners.
Analysis
Zale shares have increased more than 434% since reaching its 52 week low of $0.89/share on March 5. Now closing at $4.76, Zale prices have soared since Signet Jewelers announced better than expected sales for the first seven weeks of their FY 2010. Still, Signet’s US stores were down 2.7% including Valentines Day which doesn’t indicate discretionary spending has returned to pre-recession levels. So, while early fiscal year results for Signet were better than expected, year end results are very much in question.
Why traders think Signet’s sales trend should be an indicator of better Zale’s performance too is a big question. Perhaps the simplest reason is because the people jumping to that conclusion are just traders and not investors. Otherwise they would recognize the two companies are completely different in terms of management quality, consumer awareness, sales base, staff quality, number of stores, non-mall store base, balance sheet, and cash flow. Save for those few differences, they are just alike since they both sell jewelry in malls. But, I doubt those similarities are enough to rank Zale in the same performance group with Kay and Jared Jewelers. At least that’s the way most investors are reading it.
Still, actual short positions have increased about 50% for Signet based on its US listed shares, while Tiffany, Blue Nile, and Zale’s short interest have all declined, that according to NYSE figures, suggesting some short sellers expect Signet’s price to decrease also in spite of the companies better than expected performance.
Most likely, Zale’s short sellers will be the big winners as will penny stock traders that bought when the stock when it was in the $1 range, that‘s unless they hang in for a double dip. However, Signet’s is more problematic. According to Signet only 7.5% of the company’s float is sold short or about 6,420,000 shares. That includes 4,250,000 shares that “represent[s] the stock on loan position of our UK-listed shares”, but not included in the NYSE number of 2,170,000 US listed shares sold short.
So, for now it remains to be seen just what combination of factors are driving Signet stock values, performance, short sales, or just the irrationality of a “bull rally in a bear market” in the midst of a global recession.
