A big short squeeze is coming for Dillard's

a trade-memo, by Riccardo Formenti

09/27/2020

The idea for this trade-memo comes from Kuppy at AdventuresInCapitalism. Go check him out, he’s amazing.

Dillard’s, Inc. [DDS] is certainly an interesting company, with an even more interesting stock.

We can admire a fight between bulls and bears not seen since the good ol’ Tesla times (you know, when It was trading at $200 - pre split). Bulls say that this family-run department store has, for now, stood well the test of time with revenue flat (or slightly declining) for the past 5 years, while the stock trades at depressed valuation; or even that the value of the business lies in its assets, in the company’s physical stores. Bears instead says that DDS is destined to the same fate of J. C. Penny, eaten alive by Amazon and the online commerce.

But, as we’ll see, I don’t really care.

Free float

As of August 1, 2020, the date of the last reported 10Q, Dillard’s had a total of 22,377,191 shares outstanding. Of these, 18,366,790 were ordinary class A shares, while 4,010,401 were class B shares, a class of common stock that [1] does not trade on exchanges and [2] hold the rights to elect two thirds of the Board of Directors (BoD).

Let’s calculate the free float:

Data: Outstanding shares, class A and B, from Q2 10Q; Insider ownership from IBKR Research; Short interest from shortsqueeze.com (keep in mind that it is updated just twice a month, last available data as of 09/15/2020).

As you can see, the free float is just ~587,000 shares, or just ~2.6% of total outstanding shares. This number is definitely small.

Besides, the company has been buying back shares aggressively in the last few months, around ~500,000,000 a quarter, or around 41,500 a week, adding even more buying pressure to the stock.

DDS is poised for a BIG short squeeze.

And, as if it wasn’t enough, around ~2,000,000 shares are held by ETFs. These funds won’t sell to short sellers racing to cover their position during a big squeeze.

As with everything, there are risks to this short thesis (i.e. Covid-19 and Industry specific risks), but I think DDS represents a good, short term, opportunity to harvest uncorrelated market returns, trading at ~$29 as of 09/27/2020.

Thank you for reading.

Caveat emptor. Do not trust a 16 yrs. old on the internet. Do your own due diligence.