DraftKings, Penn Could Be Boosted by Short Covering

Posted on: September 23, 2020, 11:58h.

Last updated on: September 23, 2020, 12:42h.

Broadly speaking, gaming equities are profitable for short sellers this year, owing in large part to first-quarter slumps prompted by the coronavirus pandemic. But DraftKings (NASDAQ:DKNG) and Penn National Gaming (NASDAQ:PENN) are among the names making life uncomfortable for bearish traders.


Bearish traders are getting worried about exposure to DraftKings and Penn National Gaming.

Short interest across gaming stocks is trending higher since March, when many of the names in the group bottomed, and currently sits at $6.53 billion, according to S3 Partners data. While bearish traders remain steadfast in their views against some traditional gaming names, sports betting mania is forcing them to reduce exposure to DraftKings and Penn.

DKNG shares shorted have been relatively stable since the beginning of July. But we’ve seen short sellers taking off some of their bets since mid-August, with 3 million short shares cover, a decrease of -14%, as its stock price rallied +51%,” said S3 Partners Managing Director Ihor Dusaniwsky in a recent note.

“PENN shorts have been reducing their bets since late May, buying to cover 11 million shares, a -44% decrease in shares shorted, as its stock price rose +115%,” the note continued.

As of Sept. 17, 7.13 percent of DraftKings shares outstanding were on loan to short-sellers, while that figure climbs to 10.77 percent for Penn. Shorting those names is akin to playing with fire because the pair are up an average of 44 percent over the past month.

September Rain

Today’s retrenchment notwithstanding, casino equities are performing well in September, erasing some of the profits notched by shorts targeting the sector.

Heading into the ninth month of the year, short-sellers had $1 billion in unrealized profits tied to trades on the gaming sector. Much of that stems from operators with Las Vegas Strip exposure, including Caesars Entertainment (NASDAQ:CZR), MGM Resorts International (NYSE:MGM), Las Vegas Sands (NYSE:LVS), and Wynn Resorts (NASDAQ:WYNN).

Short positions launched in those names earlier this year are still profitable, according to S3 data. In dollar terms, MGM is the most-shorted gaming stock, with $1.02 billion of bearish positioning. Of the 10 most heavy names in the group, six operate integrated resorts in and around Las Vegas.

“The roulette ball kept hitting double zero for Casino & Gaming short sellers in the month of September, with -$702 million of net-of-financing mark-to-market losses in just half the month,” said Dusaniwsky. “If this trend continues, short sellers will be in the red for the year by the end of the month.”

Fuel for the Fire

Thanks to ongoing sports wagering ebullience, DraftKings and Penn enjoy plenty of catalysts to drive those stocks higher. Short covering is another, because as those names rise, bearish traders could be compelled to buy back shares, fueling the very rallies that are burning them.

The continued short-covering due to rising mark-to-market losses in DKNG and PENN will help drive their stock prices up,” notes Dusaniwsky.

“The upward price moves will entice potential long shareholders to buy stock or build their positions, and creates a spiral of long buying pressure, forcing even more shorts out of the trade,” Dusanisky continued. “With almost $2 billion of short interest between the two stocks, if a sizable percentage of DKNG and PENN shorts fold, the bid-side price pressure will be significant and be a force in continuing this recent rally.”

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