Actionable news
0
All posts from Actionable news
Actionable news in PSEC: Prospect Capital Corporation,

The High Cost Of Shorting Prospect Capital

Summary

Shorting PSEC is very expensive.

Hard-to-borrow costs are 11.64%.

Dividend yield is an additional 12.13%.

A recommendation on how to get your fair share if you are long PSEC.

Investors sell stock short for a variety of reasons. Often times shorting a stock is a hedge against risks within your portfolio. If you have market, credit, and duration risk in your portfolio and you want to reduce the duration or downside risk of rising interest rates, you might short a perpetual, low credit risk preferred stock such as Wells Fargo Series L Preferred (NYSE:WFC). If you are uncomfortable with the credit risk of a bond, you may hedge your risk by shorting the common stock. Other times, you pair trade two companies within the industry. Two companies could have been trading highly correlated and suddenly one company jumps up after heavy buying. You could short the company that spiked while being long the laggard, hoping for regression to the mean.

Then there is the greedy short. The position taken because you think the company's share price will drop significantly. This is the position taken by Prospect Capital (NASDAQ:PSEC) shorts. It is the only logical explanation. PSEC is too expensive to short to be used as a hedge or a pair trade. I'll walk through the costs of selling PSEC short to show the absurdity of the position.

High Borrowing Cost

When a stock is sold short, the broker must locate someone who owns shares, borrow those shares, and then sell them without ever owning them. Morningstar lists institutional ownership at 13.6%, 2.6% owned by mutual funds and 6.3% owned by insiders. Ownership is very fragmented with only BMO holding more than a 1% stake. This makes the supply of shares to borrow more difficult to locate. Meanwhile the demand to short shares is high. Below are two charts from YCharts that show the significant percent of PSEC shares outstanding that are short. 9.5% of the shares outstanding are currently short which is nearly 34 million shares.

The supply of shares to borrow is low and the demand to short is high...


More