What short do the shorts have right?
Some stocks are hated by pundits and message board commenters. But, there are some stocks that are hated so much that investors are actually put money on them collapsing. Is there a buying opportunity with those stocks or are the shorts right?
When a stock is shorted, the investor borrows shares and sells (“shorts”) them with the intention of buying them back at a later date to return to the lender. Sometimes so many shorts buy back the stock that a “short squeeze” occurs, forcing other shorts to close out their positions at even higher prices as shares become scarcer in the marketplace.
There are some stocks with sizeable short interests. Electric automaker Tesla, up over 411% in 2013 alone, is often cited as a short squeeze candidate because short interests represent 33.7% of the stock’s float.
Another famous short squeeze candidate has been Herbalife. The nutrition supplement-maker was shorted by Bill Ackman of Pershing Square to the tune of $1 billion towards the end of last year. This pitted him against billionaire investor Carl Icahn, leading to a rancorous, public dispute between the two. Herbalife is up 127% in 2013 and Ackman announced that he covered about 40% his short position, using put options instead to continue is bet that the stock will go down. Until that announcement, it was estimated that Herbalife’s short interest was 40.7% of its total float.
However, Tesla and Herbalife aren’t members of the S&P 500 Index, the market benchmark composed of 500 of America’s largest companies. Within that index, fives stocks have more than 20% of float shorted, with three stocks having more than 30%:
|JCP||JC Penney Company, Inc.||33.0%|
|CLF||Cliffs Natural Resources Inc.||32.3|
|X||United States Steel Corporation||30.1|
|PBI||Pitney Bowes Inc.||25.7|
JC Penney was, until recently, the subject of a bitter board battle involving none other than Bill Ackman. The other two of the biggest shorted stocks are steel companies – US Steel and Cliffs. All three are down this year.
Which one of these do the shorts have right?
Talking numbers on the fundamentals is John Stephenson, portfolio manager at First Asset Investment Management.
“I think all of them are in trouble for a couple of reasons,” says Stephenson on the three companies with the highest percentages of shorts. “One’s a retailer with lots of problems. The other two are related to the steel cycle.”
One of these stocks is a definite short for Stephenson.
“I would certainly short Cliffs,” he says. “I think Cliffs has got huge problems. It has cash costs around $95 a ton. When you look at what the long term price for iron ore has been, it’s in the $85 - $90 range.”
Analyzing the technicals on Cliffs to see if they agree with Stephenson’s analysis is Steven Pytlar, Chief Equity Strategist at Prime Executions. He points out that the stock had a reversal from it run-up back in August. Subsequent price action is now pointing the stock in one direction, according to Pytlar.
Are the shorts right on this one? Watch the video to see what the fundamentals and technicals have to say about it.