Waddell & Reed – Is There A Short Squeeze In The Making? – Waddell & Reed Financial Inc (NYSE:WDR)

Waddell & Reed Financial, Inc. (NYSE:WDR) is an asset management company with a long history of solid performance and dividend raises (company’s investor relations website). Currently, its annual dividend of $1.84 provides for a yield of approximately 10.8%. Although the stock is technically undervalued with a trailing P/E ratio of about 10, dividend coverage from revenues recently has not been adequate with a payout ratio of well over 100% (EPS = $1.72). This supports the short thesis, although the company has said in previous reports that they intend to support the dividend for as long as they can. Since there is practically no debt and WDR has a large cushion of cash reserves, they can probably afford to do that for the near future. However, there is the very real possibility of an upcoming dividend cut if the underlying performance parameters do not improve.

There are not too many in-depth articles about WDR on SA. Here are links to some recent and excellent articles which go into more detail about the WDR company fundamentals:

Terry A. Graffis and the long thesis; • Ian Bezek, also long; • John Abbink seems to support the short thesis.

Although the company has been having some recent setbacks which could justify the short thesis, recent political developments (here and here) have contributed to the upside. Please read the linked articles and their comment sections for more details about what the setbacks are.

Short interest in WDR is currently over 25% of the float at 16.35M shares with 11 days to cover (some sites quote the short percentage of float at only about 21%-22%). As one can see, most of the short interest has been acquired at price levels of $20 or less since the beginning of 2017. Here is a chart taken from the GuruFocus website:

At the same time as short interest has been piling on since January, institutional ownership has diminished by -10% or more. Here is another chart, also from the GuruFocus site:

Last Friday (June 9, 2017) we got to see a glimpse of what might be a massive short squeeze in the making. Closing at $18.14 (up 0.51 or +2.89%), WDR has been trading in a relatively tight range of around $16.50 – $17 with intraday highs of up to about $18 over the past few months. Friday’s volume was 4,088,328 shares traded while the average volume is about 1.5 million. The intraday price high was $19.11 or around +7.2%. Clearly, if I were short WDR at less than $20 per share, this would be quite frightening to me! I believe that much of the trading on Friday was due to short covering.

Interestingly enough, trading was halted for about an hour (between 1:00-2:15 pm) when shares were trading at about $18.88, then dropping to a low of $17.73 and closing the day at $18.14. The reason for the trading halt was a news release concerning WDR’s assets under management (AUM) outflows. Considering that the news was only mildly negative, or even neutral (which can be interpreted as good news in light of recent performance), it was certainly convenient that the day’s tremendous surge provided a cushion for the inevitable price drop which accompanies any negative report, no matter how benign.

I would sure like to know who is shorting this issue; I am assuming that most of the short interest is institutional such as hedge funds. We can assume that it is becoming more and more expensive to borrow shares of WDR since the short interest is already at all-time highs. In addition to the borrowing costs, shorts must also pay the quarterly dividend of $0.46 per share (current yield is about 10.8%). Shorting such a high-yielder is certainly not for the faint of heart. One would have thought that short interest would have fallen off more around the last ex-dividend date which was on April 6, 2017. Since it only grew more since then, and the price has not risen to intraday levels higher than about $18, those who were newly short on ex-dividend day will only see a profit if they can cover at around $17.50 or less. Some of those were clearly being squeezed on Friday.

I would keep an eye on WDR over the next few weeks and months if I were you; there will probably be more days like Friday.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.