Short selling is one way for investors to learn which companies others see as the weakest or most vulnerable during a potential market sell-off. Short sellers often bet against high-quality stocks that they believe have risen too far, too fast and underperforming stocks that they think have critical underlying problems.
One of the most important metrics for short-selling activity is short percentage of float. A stock's float is the total number of outstanding shares that are not held by company insiders or large institutional investors. When a stock has a high short percentage of float, it means a large portion of its free-trading shares are held by short sellers.
These stocks can sometimes be susceptible to short squeezes, or spikes in share price triggered by a wave of short sellers buying shares to close out their positions all at once.
S3 Partners analyst Ihor Dusaniwsky recently updated his list of the most heavily shorted stocks in the U.S. market. Here are the five most shorted stocks heading into July:
-- Tesla (ticker: TSLA)
-- Apple (AAPL)
-- Amazon.com (AMZN)
-- Microsoft Corp. (MSFT)
-- Alibaba Group Holding (BABA)
The auto industry has been one of the hardest hit economically. AlixPartners, a consulting firm, recently projected that U.S. auto sales volume will drop 20.4% overall in 2020.
Tesla reopened its Fremont, California, factory in May after a nearly two-month production shutdown. Despite the lack of production and the severe auto market headwinds, Tesla's stock is up about 129% since the Fremont factory closure.
Short sellers may see a disconnect between Tesla's strong market performance and its likely abysmal second-quarter business performance. Short sellers are not alone. In June, both Goldman Sachs and Morgan Stanley downgraded Tesla on concerns about the stock's valuation.
Tesla has by far the largest short position of any U.S. equity at nearly $16.3 billion, up by roughly $3 billion in the last two months. Tesla also has the highest short percentage of float of the five stocks mentioned, at 11.1%.
Tesla has been a disaster for short sellers in recent months, but many of them appear to be sticking to their bearish bets for now. Dusaniwsky says Tesla's short interest was up another $210.9 million in the week ending June 19.
Apple is another stock that has outperformed a weak overall market in 2020, gaining more than 20% year to date. The move has pushed Apple shares to an all-time high, and some short sellers may believe that the stock's valuation is getting a bit stretched, given macroeconomic conditions.
The launch of a 5G iPhone is likely just around the corner, which could trigger a widespread upgrade cycle among Apple customers. In addition, Apple's services revenue growth is outpacing its hardware revenue growth, boosting the company's overall margins and generating more stable, recurring revenue. Finally, Apple has roughly $15 per share in net cash, creating plenty of financial flexibility during a difficult economic climate.
Short sellers may believe that the Apple rally has run out of steam, or they may simply be using a short position in Apple as a hedge against long positions in other tech stocks. Regardless of the reason, Apple has an outstanding short position of $11.9 billion, up about $1.7 billion from two months ago.
Amazon is another high-flying tech stock that has been perfectly positioned for the economic shutdown in 2020. Amazon's cloud services business, its e-commerce platform and even its Whole Foods delivery service have benefited from the lockdown, and the stock is up about 45% so far this year.
Research firm eMarketer is projecting that U.S. retail sales will fall 10.5% in 2020, but e-commerce sales will grow 18%. Amazon is not only gaining share from struggling brick-and-mortar retailers, but eMarketer also estimates that it will expand its leading e-commerce market share to 38% this year.
As with Apple, Amazon may be used by short sellers as a hedge against long positions in more volatile tech stocks. Amazon's short interest is almost $9.4 billion, down by about $1.1 billion from two months ago.
Microsoft Corp. (MSFT)
Like Amazon, Microsoft has seen the work-from-home environment drive a surge in demand for cloud services and videoconferencing subscriptions. Daily active users for Microsoft Teams from March 12 to April 30 more than doubled, from 32 million to 75 million.
Microsoft is also gaining cloud market share from Amazon. At the end of 2019, Microsoft had about 17.6% share of the cloud market, up from 14.9% at the end of 2018, according to Canalys.
Microsoft short sellers may be anticipating a pullback after the stock rallied about 24% in the last three months. Microsoft has $8.7 billion in short interest, nearly a $107.7 million increase from a month ago.
Alibaba Group Holding (BABA)
Chinese e-commerce leader Alibaba is likely benefiting from many of the same trends that are boosting Amazon's business in 2020. Still, short sellers may be skeptical of Alibaba, given concerns about the trade war between the U.S. and China and a recent Senate bill that could delist Chinese stocks that failed to comply with more rigorous financial oversight rules.
Short sellers may be betting that Alibaba's stock will face near-term pressure as anti-China political rhetoric heats up before the November U.S. election. Or they may be betting that U.S. investors will sell their shares if Alibaba faces a delisting.
But Dusaniwsky says Alibaba's total short interest was down by $338.9 million in the week ending June 19, the largest drop among the five stocks mentioned. Alibaba has $7.8 billion in total short interest.
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