Kohl’s Corp (NYSE: KSS) has suddenly found itself at the centre of a financial firestorm – and famed investor Jim Cramer is sounding the alarm – for short sellers.
According to the Mad Money host, the massive short interest in Kohl’s stock, reportedly close to 50% of the flat, created a textbook setup for a Reddit-fuelled short squeeze.
“It was moronic” – he said bluntly referring to the hedge funds that were betting against the retail chain at single-digit valuations.
KSS shares soared from less than $10 to nearly $20 in recent sessions – and while the department store chain has returned to about $12 on Wednesday, Jim Cramer believes short sellers are playing a dangerous game still.
“They’ve run into a buzz saw of their own creation,” he warned.
Cramer says shorting Kohl’s stock is a dumb idea
Kohl’s stock has pared back most of its squeeze-driven gains, which hedge funds should capitalise on to pull out of the American chain of department stores, argued Cramer in a recent Mad Money segment.
According to him, continuing to hold a short position in the retailer is “as dumb as staying short GME in 2021.”
The famed investor even went on to lambast hedge funds for not covering their short positions in KSS shares when they crashed sharply due to Trump’s so-called Liberation Day.
“That’s precisely when the shorts should have covered. When a stock you’ve been betting against goes from $60 to $6.0, you declare victory and your ring the registry.”
Why it’s time to cover short positions in KSS shares
According to Jim Cramer, short sellers staying in Kohl’s stock despite its post-squeeze pullback may be in for a lot of trouble due to several reasons.
For starters, while the Wisconsin-based company hasn’t been exciting as an investment at all – it, shouldn’t be this heavily shorted at current levels as it, nonetheless, has a balance sheet that “isn’t all that bad.”
Additionally, KSS shares pay a rather lucrative dividend yield of more than 4.0% at writing, which could keep a particular cohort of investors (income investors) interested in them for the long-term – potentially helping put a floor beneath the retail stock here.
In fact, at a price-to-sales (P/S) multiple of 0.07 only, according to Barchart, it’s fairly reasonable to expect buyers to step in and restrict downside potential at current levels.
Why else are Kohl’s short sellers are at risk
Finally, Jim Cramer reminded hedge funds with a short position in Kohl’s stock that the department store chain attracted three serious bidders when it was going for $50 per share.
“Isn’t it natural to presume that at least one of them might come back at these levels?” especially since the firm’s team-up with Sephora and its Amazon return program adds operational value, he argued.
And since buyout deals are often agreed upon at a significant premium, such a development, if it materialises indeed, could prove catastrophic for KSS shares short sellers in the weeks ahead.
All in all, while the famed investor confirmed that he doesn’t even like shopping at Kohl’s, he believes “shorts have clearly overstepped their boundaries” in Kohl’s stock and it’s time for them to “cover and move on.”
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