A surprising trend is emerging in the Japanese stock market, where Tsuruha Holdings Inc. has become one of the most heavily shorted stocks. Investors are positioning themselves for a potential downturn, but analysts warn that this strategy may backfire and lead to a short squeeze if the company's earnings beat expectations.
What's Driving the Short Interest?
Short interest in Tsuruha was 24.9% of free float, the highest in the Topix 500 index. This buildup in bets that the shares will fall follows a roughly 60% rally this year to ¥2,800, driven by the company's merger with Aeon Co.-owned Welcia Holdings Co. The merger has led to a tender-offer-driven rally, which may fade according to investors.
The Risks of Short Selling
Short sellers borrow shares and sell them, hoping to profit by buying them back later at a lower price. However, this strategy can backfire when the shares rise, and they have to cover the short position by purchasing them at a higher price. If Tsuruha's earnings turn positive and the stock rises, particularly at a time of reduced liquidity, investors who had been betting on a drop may be forced into costly purchases.
Key Catalysts for a Short Squeeze
- Aeon's stake in Tsuruha is expected to rise to 50.9% from 41.38% following its ongoing tender offer at ¥2,900 per share, which represents roughly a 30% premium to the one-year average price of ¥2,236.2.
- Two days after the tender closes, Tsuruha is scheduled to report earnings — a potential catalyst for a share rebound and sudden short covering.
Analysts warn that if the company posts strong results, investors will rush to buy back the shares, and the stock can surge very quickly. With only around 50% of the shares remaining in free float, the market impact is likely to be significant.
Not Everyone is Convinced
Some analysts see a short squeeze as unlikely, expecting weak earnings due to escalating China–Japan tensions denting inbound tourism, which in turn weighs on retail sales. They believe the market may already be pricing in the view that there is little chance of any significantly positive surprise.
Remember, this is just a perspective, not a prediction. It's essential to do your own research and consider multiple viewpoints before making any investment decisions.