Stocks that are expected to drop in price.
Sometimes it seems nothing can stop the nine-year-old bull market rally and stock prices will keep climbing forever. Unfortunately, history suggests all bull markets eventually come to an end, and hedge fund managers are already positioning themselves by short selling stocks they believe have become overheated. Hedge funds will profit if these stock prices take a downward turn. Goldman Sachs recently released its list of hedge funds’ most heavily shorted stocks. Investors who are getting a bit uneasy about sky-high stock prices may want to consider scaling down their holdings in the following 10 stocks.
AT&T (ticker: T)
One of the biggest selling points for AT&T throughout most of the past decade was its generous 6.1 percent dividend yield. Of course, since the financial crisis of 2008, that yield has looked even more attractive thanks to historically low interest rates and bond yields. Now that bond yields have started to rise once again, investors have safer alternatives to betting on a telecom stock with declining revenue numbers.
Hedge funds’ outstanding short position: $6.3 billion
Intel Corp. (INTC)
Intel has benefited from a major cyclical boom in the semiconductor industry in recent years. However, analysts are growing concerned about a cyclical semiconductor downturn on the horizon. Investors are also questioning how much upside Intel has left after doubling the return of the S&P 500 over the past five years. Intel still has exposure to a declining PC market, and the company is facing unprecedented competition from Nvidia Corp. (NVDA), Advanced Micro Devices (AMD) and others.
Hedge funds’ outstanding short position: $3.9 billion
Walmart (WMT)
Walmart has demonstrated in the past year that it is willing to aggressively defend its market share from Amazon.com (AMZN). In fact, Walmart has invested heavily in delivery services, e-commerce offerings, international expansion and in-store customer experience. While the company expects online sales to grow 40 percent in 2018, these improvements are coming at a heavy cost, and bears are left to question just how much earnings growth Walmart will be able to deliver in the long term.
Hedge funds’ outstanding short position: $3.5 billion
Nvidia Corp. (NVDA)
When both Nvidia and Intel are among the most popular stocks to short among hedge funds, it seems clear just how skeptical Wall Street is of the red-hot semiconductor market. Nvidia has consistently put up some impressive growth numbers and is well-positioned to be a market leader in artificial intelligence, autonomous vehicles and high-end online gaming. But with the stock up 1,500 percent in the past five years, investors are starting to question whether Nvidia can deliver on its perceived value.
Hedge funds’ outstanding short position: $3.3 billion
CVS Health Corp. (CVS)
CVS Health Corp. is a stark contrast to momentum stocks like Nvidia. CVS stock is down 36.5 percent in the past three years in an uncertain health care environment. CVS is optimistic that its proposed buyout of Aetna (AET) will cement its position as one of the major U.S. health care players for decades to come. Bears argue that rising competition and waning pricing power could hurt CVS earnings. In addition, some analysts have said CVS overpaid for Aetna at a price of $69 billion.
Hedge funds’ outstanding short position: $3.1 billion
Walt Disney Co. (DIS)
When it comes to uncertainty, Disney is in a league of its own. Disney has made a bid to buy a large portion of the TV and movie studio assets of Twenty-First Century Fox (FOXA). But not only could that deal potentially be challenged by regulators on antitrust grounds, Comcast Corp. (CMCSA) has expressed interest in potentially outbidding Disney. Disney is also in the process of launching an over-the-top streaming TV service starting in 2019 to compete against Netflix (NFLX).
Hedge funds’ outstanding short position: $3.1 billion
Target Corp. (TGT)
Target is in the difficult position of fending off online competition from Amazon and brick-and-mortar competition from Walmart. To stay relevant, Target will need to continue to invest heavily in omnichannel initiatives, and these rising costs will eat into margins. Target has fallen behind Walmart in shifting to online sales, generating just $4 billion online annually compared to Walmart’s $23 billion. Target isn’t clearly differentiated from its competition when it comes to pricing or product assortment, potentially making Target susceptible to market share losses.
Hedge funds’ outstanding short position: $2.9 billion
Chevron Corp. (CVX)
Chevron is another high-yielding dividend stock that could face selling pressure as bond yields rise. In addition, due to its relatively modest downstream oil refining business, Chevron’s profitability has a relatively high correlation to oil prices. WTI crude prices are above $71 per barrel, their highest point in more than three years. Few analysts anticipated oil prices would rise this high this fast, and they could soon be heading back down if geopolitical uncertainties in China, Iran and Venezuela get resolved.
Hedge funds’ outstanding short position: $2.6 billion
Johnson & Johnson (JNJ)
Johnson & Johnson is another company potentially facing headwinds from political initiatives to lower prescription drug prices. Several of Johnson & Johnson’s key branded drugs already have generic competition, and President Donald Trump’s recently announced plan to lower drug prices includes efforts to increase generic drug competition further. Analysts have criticized Johnson & Johnson for having a lack of meaningful drug candidates in late-stage development, putting the company’s long-term pharmaceutical revenue at risk. Finally, Johnson & Johnson is facing the uncertainty of ongoing lawsuits relating to hip and knee replacement recalls.
Hedge funds’ outstanding short position: $2.4 billion
Pfizer (PFE)
Pfizer is the third health care company included in Goldman’s list of most-shorted stocks. Pfizer’s past cost-cutting initiatives could eventually come back to haunt the company, as research and development budget cuts may leave the company without enough late-stage drug candidates to drive the type of growth Wall Street likes to see. To make matters worse, Pfizer is suffering through patent expirations of leading drugs Viagra (2017) and Lyrica (2019 and 2020), which will expose the company to generic competition.
Hedge funds’ outstanding short position: $2.4 billion
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10 Stocks Hedge Fund Managers Are Betting Against originally appeared on usnews.com
