Concerns about a slowing economic recovery, a lack of additional stimulus from Washington and a potentially tumultuous November election hit the stock market hard in September. However, short sellers who were skeptical of the recovery rally and bet against certain stocks made a killing during the recent sell-off.
Short sellers often identify a flaw in a company’s underlying business. For example, short seller Hindenburg Research issued a bearish report in early September accusing electric vehicle maker Nikola Corp. (ticker: NKLA) of fraud. In other instances, short sellers simply believe that a high-quality stock has risen too high, too fast.
Rising short interest can be a red flag for investors, but stocks with extremely high short interest are also prone to short squeezes. Short squeezes occur when short sellers are forced to exit their positions all at once, triggering short-term spikes in share price.
S3 Partners analyst Ihor Dusaniwsky says these five stocks are getting the most attention from short sellers heading into October:
— Microsoft Corp. (MSFT)
— Alibaba Group Holding (BABA)
— Visa (V)
— Facebook (FB)
Microsoft Corp. (MSFT)
Microsoft has been one of the market leaders in a red-hot tech sector that led the stock market recovery from March lows. However, Microsoft was also one of many stocks that experienced selling pressure in September as traders dialed back their exposure to big tech.
From a fundamental standpoint, Microsoft’s business has thrived during the economic downturn thanks to a surge in cloud computing and remote working. In fact, Microsoft reported a 12.8% year-over-year increase in revenue in the second quarter and said its Azure cloud revenue was up 47% compared with a year ago.
Microsoft also recently invested $7.5 billion in a buyout of video game publisher Bethesda Softworks ahead of the November rollout of its next-generation Xbox console.
Microsoft short sellers may be anticipating that the tech stock sell-off rolls into October. Dusaniwsky says Microsoft has been the most heavily shorted stock in the market in the last 30 days. Microsoft’s short interest is up $1.1 billion in that time to about $7.87 billion.
Alibaba Group Holding (BABA)
Chinese e-commerce and cloud services leader Alibaba is experiencing many of the same 2020 tailwinds that are boosting Microsoft’s business. However, some short sellers may be concerned about the fallout from the ongoing trade war between the U.S. and China. The U.S. Senate even passed a bill in May that would potentially delist Chinese stocks that do not comply with strict financial oversight rules.
With the November election only about a month away, short sellers may be betting that President Donald Trump ramps up his anti-China rhetoric. Alternatively, they may simply be betting that Alibaba will be dragged down further if the tech stock slump continues.
Dusaniwsky says Alibaba has the largest short interest of any of the five stocks mentioned at $11.45 billion. Alibaba’s short interest has increased by $1.05 billion in the last 30 days.
Google parent company Alphabet is yet another example of short sellers targeting big tech stocks in September. Alphabet’s online advertising business, including its YouTube video platform, has held up relatively well during the economic downturn. Alphabet reported just a 2% drop in total revenue in the second quarter, but Google Cloud revenue was up 43%.
In addition to its core businesses, Alphabet’s Verily health and wellness business and its Waymo autonomous vehicle technology company are potential wild cards in two massive, high-growth markets.
Alphabet short sellers may be lumping it in with the rest of the struggling tech sector stocks. They may also be monitoring reports that Attorney General William Barr is encouraging the Department of Justice to bring antitrust charges against Google before the election.
Alphabet’s short interest increased by 14.4% in the last 30 days, with short sellers targeting its C-Class shares more aggressively than its A-Class shares. Alphabet’s total combined short interest, including both share classes, now stands at $7.21 billion.
Visa isn’t a pure-play tech stock like the other four stocks on this list. However, credit card and digital payment stocks have held up well with many American shoppers stuck at home.
In fact, the combined market caps of payment stocks Visa, Square ( SQ), PayPal Holdings ( PYPL) and Mastercard ( MA) recently surpassed $1 trillion, making them more valuable than the six largest U.S. banks combined. Visa and Mastercard account for a combined 69.5% of global card transactions, according to Nilson.
Short sellers betting against Visa may be anticipating a slowdown in consumer spending now that enhanced unemployment benefits have expired. Or they may be anticipating that shoppers will dial back their holiday spending in 2020 because of economic uncertainty.
Whatever the reason, short interest in Visa increased by $648.5 million in the last 30 days and now stands at $6.12 billion, Dusaniwsky says.
Facebook shares are up about 28% year to date, and the company reported 10.7% revenue growth and 97.9% net income growth in the second quarter.
However, like Alphabet, Facebook may soon face antitrust action. The Wall Street Journal has reported that the Federal Trade Commission could potentially file an antitrust lawsuit against Facebook before the end of the year.
In addition, Facebook could once again be the subject of negative headlines tied to its management of content related to the November election. Facebook was harshly criticized for how it managed user data and spread disinformation on its platforms before the 2016 election.
Facebook has consistently said it will not be fact-checking 2020 campaign ads. But the company also recently said it will not allow new political ads the week before the election, and it will reject any advertisements that prematurely declare an election winner.
In the last 30 days, Facebook’s short interest has increased by $494.8 million to $6.64 billion.
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