One important way for investors to track investor sentiment is to look at short-selling activity. Short sellers tend to bet against high-quality stocks that they believe have become overvalued and underperforming stocks that they believe represent businesses in secular decline.
Short percent of float is an important metric for understanding just how aggressive a stock’s short sellers are. A stock’s float is its total number of shares that trade freely on the market and are not held by large institutional investors and company insiders.
A stock with a high short percentage of float could be vulnerable to a short squeeze, a large short-term spike in share price triggered when short sellers are forced to close out their positions all at once.
S3 Partners analyst Ihor Dusaniwsky says these five stocks are getting the most attention from short sellers:
— Apple (ticker: AAPL)
— Alibaba Group Holding (BABA)
— Microsoft Corp. (MSFT)
— Tesla (TSLA)
Apple has been a top market performer in a difficult year. The stock is up almost 50% year to date, and Apple’s market cap has grown to $1.88 trillion. Investors are optimistic about Apple’s 5G iPhone launch later this year, and Apple’s impressive cash flow and strong balance sheet provide safety in an uncertain economy.
Apple bulls are hoping that the 5G iPhone triggers a wave of upgrades among users. The company has been shifting its business model from device sales toward more high-margin, recurring services revenue, but it recently reported impressive 31% iPad sales growth year over year in the second quarter. Apple also announced a 4-for-1 stock split.
Apple short sellers may be betting that the 5G iPhone launch will mark a top for Apple stock, or they may simply be using Apple as a hedge against long positions in other tech stocks. Whatever the reason, Apple logged $3.05 billion in short selling in July, more than any other U.S.-listed stock, Dusaniwsky says.
Chinese e-commerce giant Alibaba has been perfectly positioned to benefit from the 2020 economic shutdown. Last quarter, Alibaba’s online retail and cloud services businesses helped drive 51.9% adjusted net income growth and 37.7% revenue growth.
Alibaba accounts for about 56% of China’s e-commerce market, according to Statista. China’s overall retail spending is on track to shrink by 4% this year, but eMarketer projects the nation’s e-commerce spending will continue to grow by 16%.
In July, Alibaba announced a potential $200 billion initial public offering of affiliate Ant Group, in which Alibaba holds a 33% stake.
Short sellers may be betting political tensions between the U.S. and China will continue to rise heading into the November presidential election. Alibaba short sellers added $2.78 billion to their positions in July.
Microsoft is another company with a business model that is immune from work-from-home disruption, and its share price performance in 2020 has reflected that advantage. Microsoft shares are up about 35% year to date, thanks to booming demand for cloud services and videoconferencing software.
The technology company reported 13% revenue growth last quarter, including 47% growth in Azure cloud revenue. Microsoft’s gaming business is also booming, thanks to the current climate. Xbox content and services revenue was up 65% in the second quarter ahead of the Xbox Series X gaming console’s launch later this year.
Microsoft short sellers may be anticipating a pullback with the company’s market cap now at $1.6 trillion, or they may simply be using the stock as a tech hedge. Microsoft’s short interest increased by $2.29 billion in the past month.
Electric vehicle maker Tesla has the most short interest of any stock in the world at $16.5 billion. Short sellers and value investors are baffled by the stock’s valuation and performance.
Tesla shares are up almost 550% in the last year, yet the company recently reported a 4.9% drop in revenue in the second quarter. Second-quarter vehicle deliveries were also down 4.7% from a year ago, despite opening a factory in China and rolling out Model Y.
However, Tesla reported its fourth consecutive quarter of profits, making its stock eligible for inclusion in the S&P 500. Tesla bears were quick to point out that electric vehicle regulatory credits sales, not auto sales, accounted for all of Tesla’s net income in the second quarter.
Tesla shares now trade at 100 times forward earnings and 11.5 times sales, a valuation far beyond any auto peers and even a sizable valuation premium relative to many high-growth tech stocks.
Tesla short sellers added $1.8 billion to their positions in the last month, bringing Tesla’s short percent of float up to 7.3%, the highest among all five stocks.
Google parent company Alphabet, including its YouTube video platform and its online advertising business, has been relatively resilient during the 2020 downturn. Its Waymo subsidiary is also among the global leaders in autonomous vehicle technology, potentially creating a significant long-term growth opportunity.
However, short sellers are likely concerned with the many risks facing big tech companies these days, including the potential for higher taxes and increased regulation. CEO Sundar Pichai defended the company in July against antitrust charges before Congress. Alphabet also reported its first revenue decline in the second quarter.
Alphabet has the smallest short position of all five stocks mentioned at $4.88 billion. But Alphabet’s short interest increased in July by $1.21 billion.
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