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Can Short Sellers Make This Stock Buckle?

By Ari Charney on January 7, 2013

What should we make of a stock that’s had persistently high levels of short interest for more than three years, but whose shares continue their inexorable march upward? For much of the period since late 2009, casual apparel retailer Buckle (NYSE: BKE) has had a short interest ratio well above 10, at one point peaking near 36 in mid-October of last year.

The short interest ratio compares the total number of shares sold short against a stock’s average daily trading volume. The resulting figure gives investors an idea of how many normal trading sessions would be required for all shorts to cover their positions. When a stock has a high number of “days to cover,” short sellers risk getting caught in a short squeeze, where a sudden rise in share price causes ever greater numbers of shorts to cover their positions and push the stock even higher.

Last year, I wrote about constructing a screen to find potential short squeeze candidates. I was looking for stocks that had solid fundamentals, but had perhaps been unfairly attacked by short sellers.

As far as short interest goes, I screened for stocks that had a high number of days to cover, but a low percentage of their float sold short. With regard to the latter, I wanted to make sure that a stock’s float wasn’t so thoroughly dominated by shorts that even if nothing ominous was afoot with the underlying business, it would still be difficult for the stock to undo the damage.

But Buckle offers an interesting alternative to the latter theory. It has both a high number of days to cover (currently at 13) and a high percentage of its float held short (21.5%). And yet the small-cap growth stock has gained more than 24 percent annualized over the past three years. And lest you think that short-term performance is a fluke, the stock has returned almost 23 percent annualized over the past decade.

Of course, as a mid- to high-priced retailer of men’s and women’s casual apparel, the relatively small Buckle does face the risk that it will fail to keep up with the latest trends.

Additionally, it has just 440 stores across 43 states, with a substantial geographic concentration in the Midwest. Though the company is clearly expanding beyond the Corn Belt, its earnings could still have outsize exposure to any weather that impacts the success of the crop season, such as last summer’s historic drought.

So will the shorts eventually be proved right? Perhaps, but for now Buckle has a management team whose interests would certainly appear aligned with shareholders. Insiders own almost 42 percent of shares outstanding. That’s one of the reasons why the company has such a high percentage of its float held short. With insiders holding so many shares, the actual float available to investors is just 58 percent of shares outstanding.

Even with the stock’s incredible rise over the past decade, shares are hardly priced for perfection. Buckle’s price-to-earnings ratio (P/E) is 13.5, compared to an industry average of 18.4. And its forward PE is just 12.0.

The company has grown sales 10.3 percent annually over the past three years, while earnings have risen 12.6 percent annually. And the company’s operating margins and net margins are more than double the industry average.

To be sure, even as sales have risen, earnings have started to flatten. While sales are forecast to rise 9.1 percent during the company’s next fiscal year, earnings are expected to increase by just 3.5 percent. Even so, management has judiciously managed analyst expectations, with earnings beating consensus estimates in four of the past five quarters.

The $2.1 billion market cap company also boasts a solid balance sheet, with $245 million in cash at the end of its most recent quarter and no long-term debt.

Despite being a small-cap stock, Buckle has been paying a dividend since 2003, when its market cap was just under $500 million. Its shares currently yield 1.8 percent.

The company normally pays a $0.20 quarterly dividend, but it also paid a special dividend of $4.70 per share in early December. Although special dividends were all the rage this year, as companies attempted to help investors avert higher taxes in 2013, Buckle has actually paid a sizable special dividend in each of the past four years.

Even though this company has repeatedly disappointed short sellers, I’m leery of retailers that are so dependent on fashion trends. And the huge percentage of the float held short coupled with decelerating earnings make me even more wary of this stock. In particular, the latter suggests that Buckle’s shares may not be able to defy the shorts for much longer.

Analysts are similarly cautious about Buckle’s prospects, with just one of the 10 who track it currently rating it a “buy.” Six rate it a “hold,” while three rate it a “sell.”

It’s entirely possible that Buckle could prevail and become the next Gap (NYSE: GPS), but I’d rather watch its progress from the sidelines.

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