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BBBY Stock: Why It's Getting Harder to Short

Bed Bath & Beyond shares have been a big short-selling target. However, indicators show that short sellers are getting uncomfortable. Here's what you need to know.
  • Bed Bath & Beyond's current short interest corresponds to about 42% of its float.
  • BBBY's borrow rates have been on a strong upward trend since June.
  • The current scarcity of shares available for lending also indicates that short sellers must be increasingly resourceful to short BBBY.
Figure 1: BBBY Stock: Why It's Getting Harder to Short

Figure 1: BBBY Stock: Why It's Getting Harder to Short

(Read more from Wall Street Memes: BBBY Stock: Meme Season Has Begun)

What Is a Stock Borrow Fee?

Stock borrow fees, also called stock loan rates, are fees charged by brokers to lend shares to short sellers who want to bet against the stock.

Market supply-and-demand conditions determine borrow fee rates. When there is a lot of demand from short sellers, borrow fees will be proportionately high, based on the supply of shares available for lending.

Borrow fee rates serve as a risk-return indicator for traders. When borrow fees are too high, you need a good reason to believe that the stock will plunge to make your short position worth the cost.

What Can Borrow Fees Tell Us About BBBY Stock?

The latest Interactive Brokers data shows that the annualized borrow rate for Bed Bath & Beyond is currently 6.5%.

So far, the BBBY borrow rate peaked at the end of July, when it reached 8.4%.

Figure 2: Bed Bath & Beyond borrowed shares.

Figure 2: Bed Bath & Beyond borrowed shares.

Even though shorts account for about 42% of Bed Bath & Beyond's float, current borrow rates are not super-high yet.

Generally, borrow rates exceeding an annualized 10% are considered high. For example, GameStop  (GME) - Get GameStop Corporation Report currently has borrow rates around 32%.

However, BBBY's borrow rates are on the rise. Currently, they're at least six times higher than they were during most of the first half of the year. Since the beginning of August — when BBBY became more popular among retail investors on social media — rates have been rising steadily.

BBBY: Fewer Shares Available to Short

Another important indicator is the number of shares available to be lent to short sellers. As the chart above shows, with a few exceptions, Bed Bath & Beyond shares have become scarcer since July.

Ortex data indicates that the utilization of Bed Bath & Beyond's stock has been at 100% for nearly 20 consecutive days. When utilization is at 100% — that is, at its maximum — it means that, at the start of the trading day, all available shares have been lent. When this happens, short sellers need to be more resourceful to find shares to borrow.

The Bottom Line

Because BBBY has a very high level of short interest, bears can end up being caught off-guard by short squeezes. That's largely because Bed Bath & Beyond shares have "meme" appeal, and retail investors are betting on the stock just to squeeze short sellers.

It's been too easy for short sellers to profit from betting against Bed Bath & Beyond's stock. The company's fundamentals have been deteriorating, its valuation has not aligned with its business, borrow rates have been low, and there's been a good availability of shares for lending.

These factors have led BBBY's short interest to grow higher than 40%.

However, since July, the situation has been changing. The short squeeze in early August reignited BBBY's popularity among retail investors. The Bed Bath & Beyond ticker has been gaining in popularity over GameStop's.

Figure 3: Trending stocks on Reddit on August 12.

Figure 3: Trending stocks on Reddit on August 12.

We should expect that short interest in BBBY will continue to increase. That should result in a lower supply of shares, provoking a rise in borrow rates for the stock — as we've seen starting to happen in the last few months.

In turn, that will likely lead to more short squeezes as short sellers scramble to exit their positions.

(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 Wall Street Memes)