RH: Insiders vs. Shorts

The most recent short interest data was recently released by the NASDAQ for the 02/28/2014 settlement date, and Restoration Hardware Holdings, Inc. (RH) is one of the most shorted stocks of the Russell 3000, based on 5.37 "days to cover" versus the median component at 4.15. There are a number of ways to look at short data, but one metric that we find particularly useful is the "days to cover" because it considers both the total shares short and the average daily volume of shares typically traded. The number of shares short is then divided by the average daily volume, to express the total number of trading days it would take to close out all of the open short positions if every share traded represented a short position being closed.

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In the case of Restoration Hardware Holdings, Inc. ( RH), the total short interest at the 02/28/2014 settlement date was 4,038,218 shares, which compares to the average daily trading volume of just 751,710 shares, for a "days to cover" ratio of 5.37.

When short sellers eventually cover their positions, by definition there must be buying activity because a share that is currently sold short must be purchased to be covered. At the present levels of short interest, if from this point forward every single RH share traded represented a short position being closed, then at the average daily volume of 751,710 shares it would only be during the 6th trading day that every short position would be closed.

So it would stand to reason that should some unexpectedly good news come out, and short sellers did not have 6 days of patience but instead wanted to cover their short positions very suddenly, that situation could result in sending the stock higher until the higher price produces enough sellers to generate the necessary volume to close out those positions quickly.

Restoration Hardware Holdings, Inc. ( RH) has something relatively rare for a stock with this much short interest, that being insiders taking the other side of the trade. Looking back over the trailing six month period, RH has seen 2 different instances of insider buying, as summarized by the table below:

Purchased Insider Title Shares Price/Share Value
12/19/2013 Thomas D. Mottola Director 15,400 $64.97 $1,000,538.00
12/18/2013 Mark S. Demilio Director 7,875 $63.23 $497,899.50

Below is a chart showing the "days to cover" for RH over time:

Loading+chart++2014+TickerTech.com

And looking at the chart below, RH's low point in its 52 week range is $32.02 per share, with $78.50 as the 52 week high point — that compares with a last trade of $64.44.

Restoration Hardware Holdings, Inc. Moving Averages Chart

In recent trading, shares of Restoration Hardware Holdings, Inc. ( RH) were changing hands at $64.44/share.

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