Hollis Johnson
Tuesday's sharp loss in Chipotle shares following the company's latest food safety scare should've been a major boost to short sellers.Instead, they remain in the red for the year after a series of decisions that left them ill-equipped to fully profit from a big selloff.
While short speculators did make $55 million on Tuesday - recouping roughly one-third of their year-to-date loss as Chipotle's stock dropped as much as 8% - the windfall could've been much larger, according to financial analytics firm S3 Partners.
The first miss for Chipotle stock pessimists this year came in mid-April, when they pushed short interest to a 2017 high at a time when the company's shares were up 27% year-to-date, says S3. Those bets failed as the stock continued to climb, hitting their 2017 peak about a month later.
Only after that did the short sellers start to cover their positions in earnest - just in time for the stock to start drifting lower again. In other words, they missed out on a chunk of the weakness they'd been expecting for so long.
"Timing for short sellers this year was less than optimal," said Ihor Dusaniwsky, the firm's head of research. "They built their positions as Chipotle's stock rallied, and bought to cover as Chipotle's stock declined."
As such, this long, winding road of futility has lost short sellers about $104 million year-to-date, even after Tuesday's big stock decline.
Now, Chipotle speculators are faced with a fresh dilemma, and what they do next will largely depend on how widespread they expect the restaurant chain's latest food safety issue will be.
If they don't see the outbreak spreading to other Chipotle locations, they'll likely continue to curtail short selling, says S3. In fact, the analytics firm thinks that some bearish speculators may view the issue as a short-term hiccup, and cover shorts to realize profits on the drop. That would then help the stock recover.
After closing 4.3% lower on Tuesday, Chipotle is down an additional 0.7% in pre-market trading.
Chipotle stock price has been a rocky road this year, and short sellers have frequently been on the wrong side of it.