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Wynn Resorts (NASDAQ:WYNN) has more than tripled off its March lows. While WYNN stock is higher by 62.23 percent in the fourth quarter, it could deliver more gains early next year, as short sellers cover trades in the gaming name.
Owing to the coronavirus pandemic, gaming stocks of all stripes were favored targets of bearish traders this year, including integrated resort operators such as Wynn. Building the case for the Encore operator as an early 2021 trade from the long side are tax reasons.
Shrewd investors can delay paying taxes on profits by a year if they wait until January to sell off their winners,” says Schaeffer’s Investment Research. “Similarly, short-sellers who have made money can wait until the new year before covering their shorts.”
In layman’s terms, a trader could be sitting on a profitable bearish position in Wynn today. But if he or she covers that exposure before the end of this year, taxes must be paid on it for 2020. By waiting until 2021 to exit the trade, the market participant won’t have to pay taxes on the winning position until early 2022.
Currently, short interest as a percentage of Wynn’s float is 13 percent, according to Schaeffer’s data. There are plenty of stocks with larger short interest, but that Wynn slice is meaningful enough for multiple reasons.
First, it would likely take days or even a week or two to cover all of that bearish exposure. Second, if Wynn stock rallies in January without the benefit of short covering, traders holding bearish bets on the name could be forced to exit, driving the shares higher in the process.
Shorts taking those trades on Wynn into 2021 are taking on plenty of risk. The stock is up almost 21 percent over the past month, and analysts view gaming as the leisure industry best-positioned to recover in the new year.
The operator of two Macau integrated resorts resides around $114 at this writing. But some analysts see the stock rising to $130. Wynn stock hasn’t traded above $130 since before the coronavirus slump, and if it hits that mark, it would likely eradicate unrealized profits held by short sellers.
Why It Matters
Recent history indicates heavily shorted stocks often perform well in the first week of January. Entering the first week of 2020, 71 stocks fit the criteria of having short interest of 10 percent or more and losses of 10 percent or more in the prior year – specifications Wynn will likely have.
Fifty-two percent of those names beat the S&P 500 in the first week of January, according to Schaeffer’s data.
Entering the first week of 2019, 90 US-listed equities fit those parameters, and nearly 89 percent posted positive returns in the initial week of the new year, with 87.8 percent topping the S&P 500.