Meat packing plants have been shutting down due to Covid-19 causing a decline in finish products and feed lots unable to sell their livestock causing disruption in the food industry. This prompted Tyson chairman, John Tyson, to place ads in several newspapers stating “the food supply chain is breaking.” President Trump recently invoked the Defense Production Act to force meatpacking plants to continue operations. The Packaged Food & Meat Sector will be a volatile sector as Covid-19 issues play out with both longs and shorts becoming more active.
The largest stocks in the Packaged Foods & Meats Sector are:
Overall, short interest in the Packaged Foods & Meats Sector is $11.09 billion, with Short Interest as a Percentage of Float of 8.64% and average stock borrow costs just above General Collateral levels at 0.41% fee. While short selling has been active in the sector with +$1.04 billion of short selling over the past month, there has been net short covering over the last week with -$231 million of buy-to-covers.
Looking at bearish sentiment over the past month, we can break out short selling activity in the first three weeks of the last month versus short selling activity over the last week to see if the level of bearishness of short sellers changed over time.
Stocks with continuous short selling over the entire month indicate that short sellers continued to build their short exposure and their bearish conviction has not wavered. This is especially true in Beyond Meat (BYND) and Hormel Foods (HRL). BYND shorts are selling into what they believe to be an overbought name, even in the face of mounting mark-to-market losses while HRL shorts are selling into negative news as we see short selling increasing by ten-fold over the last week compared to the first three weeks of the month.
Short sellers whose bearish conviction has flipped are now beginning to cover their open short positions. Mondelez Intl (MDLZ) short sellers, who were mildly bearish over the first three weeks of the last month, have reversed course and covered 26% of their open short positions over the last week. Other short names with a significant change in conviction are General Mills (GIS) with 17% of short exposure covered over the last week; Kraft Heinz (HNZ) with 16% of short exposure covered and Hershey (HSY) with 20% of short exposure covered.
Packaged Foods & Meat shorts which have had continued short covering throughout the last month are showing us that their bearish sentiment continues to wane as shorts continue to trim their positions. Nestle (NSRGF) and Post Holdings (POST) have seen their short covering accelerate over the last week while short covering in Nomad Foods (NOMD), Flowers Foods (FLO) and Treehouse Foods (THS) has continued but slowed appreciably.
There were just a few Packaged Foods & Meats stocks where short covering turned into short selling over the last month. Conagra (CAG) saw the biggest change in sentiment with -$33 million of short covering over the first three weeks of last month almost totally reversed with +$24 million of short covering over the last week. The bearish sentiment of CAG short sellers has increased, and they are actively rebuilding their positions.
Short sellers in the Packaged Foods & Meats sector have been profitable in 2020, up +$566 million in mark-to-market profits, +4.3% on the year. Two-thirds of the shorted stocks in the sector have been profitable trades in 2020 versus one-third being losers. But over the last week, 70% of the stocks had mark-to-market losses versus only 30% being winners. Over the last week, shorts were down -$231 million in mark-to-market losses, giving back 28% of their year-to-date gains in just 5 trading days.
Looking at short selling trends over time provides insight into overall market sentiment as well as the strength of bearish conviction in individual equities. Our Blacklight SaaS platform and Black APP provides an up to date view of short selling and short covering on an equity, sector, index or country-wide basis allowing investors\traders to better manage their existing long and short positions as well as generate new trade ideas.
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Managing Director Predictive Analytics, S3 Partners, LLC
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