Verizon Communications Inc. (NYSE: VZ) stock has struggled so far in 2018, and new data from Bank of America suggests short sellers are betting big that rising interest rates will continue to pressure Verizon.
According to Bank of America analyst David Barden, Verizon’s short interest climbed 21.6 percent in the past two weeks to approximately $393 million. High-yielding competitor AT&T ( T) also has roughly a $395 million outstanding short position, but Verizon has endured the lion’s share of the short selling pressure recently.
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“We view the underperformance and increase in short interest in VZ as a reaction to rising rates reflecting the already larger underweight/short position in AT&T,” Barden says.
Short sellers banking on rising interest rates may see the AT&T/Time Warner ( TWX) antitrust trial as a potential bullish near-term catalyst for the stock and are choosing to focus on Verizon for now.
For years, historically low interest rates have given income investors very few options. However, bond market investors are pricing in a 94.4 percent chance that the Federal Reserve will raise interest rates once again this week after three rate hikes in 2017. With U.S. unemployment at its lowest level since 2000 and inflation finally starting to tick higher, analysts expect new Fed chair Jerome Powell to continue Janet Yellen’s slow, steady pace of interest rate hikes.
The higher interest rates rise, the less appealing Verizon’s 4.9 percent dividend looks for investors.
Despite the weakness so far in 2018, CFRA analyst Angelo Zino says Verizon’s expensive 5G network will soon start paying off for investors. Verizon has said it will have its 5G network up and running in five U.S. cities by the end of 2018, starting with Sacramento in the second half of the year.
“We anticipate a challenging industry landscape given competitive pressures, but we see potential for higher equipment revenue from next-generation smartphone launches,” Zino says.
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Zino says interest rates aren’t nearly high enough for investors to worry at this point.
“We think the fundamentals of the Telecom Services sector support the thesis that the sector should be viewed as an ‘equity bond’ and shares should benefit amid a still low but rising interest rate environment,” he says.
CFRA has a “hold” rating and $56 price target for VZ stock.
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Investors Are Laying Bets Against Verizon Communications Inc. (VZ) Stock originally appeared on usnews.com
