The holiday season does not officially kick off in the US until next week, but some stockings hung up on Wall Street have already received a lump of coal.
Mattel, maker of Barbie dolls, Hot Wheels cars and other childhood favourites, was hard hit after Toys R Us filed for bankruptcy in September.
Having a big distributor go bust on the eve of the prime selling season is not a terribly merry harbinger. Shares slumped, sales dropped and Mattel suspended its dividend.
Short sellers, who borrow shares and sell them in the hopes of buying them for a cheaper price when they need to deliver later, zeroed in on the company.
Last week, short interest in Mattel topped out at 33 per cent of shares outstanding, making it the most shorted stock in the S&P 500 benchmark index, according to IHS Markit. For comparison, short interest on the S&P 500 was 2.6 per cent of shares outstanding for all companies in the index.
Enter Hasbro. The maker of the Monopoly board game (ironically enough), made a play for its rival Mattel in a move that would unite the two largest toy companies in the US. Shares in Mattel — once the larger of the two rival toymakers — soared.
“Dare we say, Hasbro is the Grinch who stole short sellers’ early Christmas present,” says Simon Colvin, a research analyst at IHS Markit.
A short position taken in Mattel in the days leading up to the bankruptcy of Toys R Us would have returned about 20 per cent, ahead of the Hasbro offer. The ensuing jump in Mattel’s shares, which have rallied more than a fifth since Friday, caught short sellers off guard. Short sellers now are collectively down about $500m on Mattel, Mr Colvin estimates.
Shorting retail is always a hot topic heading into the holiday season. That is particularly true this year with the outlook for traditional brick and mortar retailers darkening against the increasing adoption of online shopping.
The chastening Mattel experience shows, however, that the returns on what can appear to be even the most obvious candidates for the naughty list are not always nice.