Thursday, September 18, 2008

ACAS Up >29% Today

According to, today's 29.5% share price increase in American Capital Ltd. (ACAS) wasn't the work of short-sellers covering, as the short interest actually increased from 34.0 million shares to 38.9 million shares, to 19.11% of the float.  Institutional interest stands at 43.5%, down a bit from the 45% observed in May, so it's not as though suddenly pension funds started loading up.

The increased short interest is oddly bullish, in my view:  it represents a pool of shares that must be covered as share prices rationalize.  In essence, shorts taking a position in ACAS bet the dividend won't be paid, or that share price declines will offset paid dividends.  These must be the case for short-sellers to maintain their positions, because the alternative is that short-sellers must pay the dividends to the holders of the shares they've sold short.  Short-sellers' theory requires that past performance not be an indicator of future results, as ACAS' past performance includes the declaration, since a 1997 IPO at $15, of over $29 in dividends

Short-sellers banking on an illiquidity-related collapse are essentially playing chicken with a train that's been building momentum since ACAS' CEO began doing employee-led buyouts in the 1980s.  ACAS' management either has a pipeline full of portfolio comany sale deals in various stages of closing, providing a source of ongoing liquidity without need to access capital markets, or management lied on the last several conference calls.

I don't understand the short play, unless it's a short-term confidence play, or a bet that everything here is a direct lie.

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