Investors bet against Kate Spade as deal chatter intensifies

Models pose during the Kate Spade presentation at the Rainbow Room in New York on Feb. 12, 2016.
Adam Jeffery | CNBC

Kate Spade's shares soared more than 13 percent Thursday after the handbag maker confirmed that it is exploring a potential sale of its business.

But not everyone on Wall Street is convinced that the recent runup in its stock is warranted.

With shares of Kate Spade up some 50 percent since chatter started swirling about a potential sale in December, short interest has simultaneously shot higher.

According to S3 Partners, an independent financial data firm, roughly 10 percent of Kate Spade's shares are out on loan. Investors borrowed these shares with plans to sell and repurchase them later when the price drops. The goal is to profit on the price difference.

Kate Spade hasn't seen such high short interest since March, when it was trading near its 52-week high, S3 noted.

"Shorts have continued to pile in, recognizing that the premium price into the stock amid the swirling rumors may be a bit rich," the firm said in its analysis.

Kate Spade stock was last trading hands at $22.29.

In a note to investors Thursday, Wells Fargo analyst Ike Boruchow said he views a sale as "increasingly likely" following Kate's fourth-quarter earnings report. The company reported sales growth that just missed a consensus forecast. Earnings easily beat expectations due to a better-than-expected gross margin.

Boruchow noted a buyer would most likely be interested in Kate Spade's healthy brand, which has not been overdistributed in the same way as its top competitors. It also has runway to expand its distribution at third-party retailers and overseas, Boruchow said.

Boruchow listed Michael Kors and Coach as two likely suitors. Neither company has confirmed interest in the brand.

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