The Ratings Game: Square shorts have been covering their positions before Wednesday’s earnings

Square Inc. remains a popular target for bearish bets within the mobile payments sector, but short sellers have been covering their positions in recent weeks.

Shorts have reduced their bearish exposure by covering 2.5 million shares since Feb. 5 heading into Square’s SQ, -4.31% Wednesday afternoon earnings report, according to financial data and analytics company S3 Research. This activity reduced short interest in the stock by about $200 million in that span after short interest increased by $277 million during January.

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Bearish bets against Square haven’t paid off so far this year, with shorts down $561 million in paper losses during 2020 and down $189 million during February alone. Those mark-to-market losses mean that Square shorts have had the worst year-to-date performance in the data-processing and outsourced-services sector on the year.

Square shares have rallied 37% from their 12-month low close of $56.76 in September, and they’re up 24% so far in 2020 as the S&P 500 SPX, -2.37% has dropped about 2%.

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In the lead up to Square’s earnings report, Keefe, Bruyette, & Woods analyst Steven Kwok writes that he thinks “a continuation of the usual ‘beat-and-raise’ story is necessary this year to sustain the high valuation level, particularly given the level of investment spend.”

S3 managing director for predictive analytics Ihor Dusaniwsky writes that an upbeat report “may create a short squeeze and accelerate short covering in the stock as more short sellers pare down their exposure in the face of mounting mark-to-market losses.” If Square were to merely meet expectations, there may not be much incremental long buying but he said that short covering could continue as bears seek to bring short interest closer to historical levels.

Current short interest stands at $2.6 billion, compared with $2.1 billion on average in 2019 and $1.9 billion in 2018.

Square, Inc. is a financial services, merchant services aggregator, and mobile payment company based in San Francisco, California. The company markets several software and hardware payments products. The company was founded in 2009 by Jack Dorsey, the co-founder of Twitter, and Jim McKelvey.