Short-sellers have found themselves on the wrong side of the trade, and not for the first time. The screen grab below, from the Shortman website, highlights the percentage of Select shares that were held by shorters up until a week ago.
As of last week, SHV was the 26th most shorted Australian stock, although after the strong share price movement yesterday it would be fair to assume that more than a few of these shorters have since bolted for the exit.
Long-term holders may recall that there was a similar short-squeeze back in 2017, after the brigade of short-sellers who had piled on to the ill-fated Quintis decided to switch their focus to another listed tree-grower with a crestfallen chart. Back then, Select even made it to the ten-most shorted stock list.
The share-price ended up being driven below the $4 mark by September of that year, only to swiftly rebound back up above $5 as short sellers deserted en masse in the wake of some takeover speculation.
The short-seller attack in 2017 was particularly intense, but it certainly wasn't the first time that Select Harvests has been the subject of their unwanted attention.
In Select's vast orchards around the Murray River, under each almond tree there is a stone engraved with the name of a short-seller who lost money betting against this stock. Or at least, there could be, that's how many short-sellers have made ill-fated bets against this stock over the years.
I think the mistake that the shorters keep making with this stock is that they fixate too much on the company fundamentals, and not quite enough on California, which is the world's largest almond growing region by a country mile. The growing conditions in California dictate the almond price, and the SHV share price tends to track the orbit of the international almond price.
The situation in California is dire, as has been known for some months, and the substantial gulf between the May Californian almond subjective estimate and the recently released objective estimate is reflective of the deteriorating conditions. I find it a little surprising that so many short-sellers underestimated the impact of the current severe drought on Californian's growers, but that said, a number of comments on these threads in recent months suggest that some shareholders fell into the same trap.
Even following on from the strong share price gains yesterday, I feel that there is good reason to believe the share price will continue to head north over the next 12 months or so, primarily for the following two reasons:
1. Firstly, the volume of shares traded was quite high yesterday, with just over a million shares changing hands. Select Harvests has circa 100 million shares outstanding in total at current. The data from Shortman suggest that there might still be around three million shares in the hands of short-sellers.
The chances are that most of these will be looking to exit in the weeks ahead, which implies that there might be further share price upside.
In the wake of the 2017 short-attack, the Select share price rose from a low of $4 to just over $7, a gain of more than 75%. The low for SHV this year was around the $5 mark back in January, so if we take the 2017 example as a guide, the share price could be expected to settle somewhere between the $8 - $9 range in the weeks ahead.
2. Secondly, historical climate patterns suggest that the Californian drought will probably last at least three years.
It is curious to note that over the past hundred years or so, there has never been a two-year drought in California (my definition of 'drought' in this instance is a succession of years of below average precipitation, a rather simplistic determination, but a practical one). The shortest multi-year droughts within living memory have been at least three years, and there have been many such droughts since the 1930s.
Needless to say, there is no iron-law dictating that a two year drought in California is an impossibility, as there are countless factors that influence weather and climate. But historically, in the west of the USA droughts have tended to last at least three years, and this pattern would indicates that the drought will continue into 2022, with predictable implications for the almond price.
There is also some reason to believe that almond demand could increase, as vaccine production is ramped up and more countries start getting on top of the covid-plague. If so, the combo of less available supply and more demand could be particularly positive for almond prices.
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