Concerns about an ongoing health crisis, lack of economic stimulus from Washington and a potentially tumultuous election have created stock market volatility heading into November. Short sellers see too much risk ahead for stock prices to go any higher in the near term.
Instead of typical investors who bet on stock prices to rise, short sellers identify companies with troubled businesses or stocks that they believe are overvalued and bet on them to trade lower. When a stock price rises too high too fast, short sellers often jump in and attempt to profit on the inevitable pullback.
Rising short interest can be a red flag for investors, but heavily shorted stocks are also prone to short squeezes. Short squeezes are large, short-term spikes in a stock’s share price produced when heavy losses drive short sellers to exit their positions all at once by buying shares of stock.
S3 Partners analyst Ihor Dusaniwsky says these five stocks have been getting the most attention from short sellers heading into November:
— Sun Communities (ticker: SUI)
— Alphabet (GOOGL)
— Analog Devices (ADI)
— Alibaba Group Holding (BABA)
— Peloton Interactive (PTON)
Sun Communities (SUI)
Sun Communities is a real estate investment trust, or REIT, that owns, operates, sells and leases manufactured housing and RVs. Dusaniwsky says more than 90% of Sun’s $1.45 billion in net short interest heading into November represents new positions created in the past 30 days. Not only has Sun experienced the largest percent increase in short interest in the past month, but the stock also has endured nearly twice as much short selling as any other U.S.-listed stock in the past month, according to S3.
Of the five stocks mentioned, Sun has the highest short percent of float at nearly 10.8%. A stock’s float is the total number of outstanding shares that are free trading on the market and not held by institutional investors or company insiders.
Sun shares tanked during the first wave of the pandemic back in March, and short sellers may be betting on a repeat performance if the health crisis worsens in the next couple of months. Sun’s short interest increased by $1.31 billion in the past 30 days to $1.45 billion.
Google parent company Alphabet is another one of short sellers’ favorite targets heading into November. It’s understandable why short sellers might target Alphabet after the U.S. Department of Justice filed an antitrust lawsuit against Google in October alleging the company has engaged in noncompetitive practices to maintain monopolies in internet search and advertising.
It’s never great to be sued by the U.S. government, but analysts like CNBC’s Jim Cramer have said a potential breakup of Alphabet into smaller companies actually would likely unlock value for existing shareholders by allowing for a higher valuation for Alphabet’s higher-growth businesses.
Short sellers may be betting that the antitrust lawsuit and other regulatory pressures will negatively impact Alphabet’s business and market valuation. Or they may be betting on another downturn in online advertising in coming months. Whatever the reason, Dusaniwsky said Alphabet’s short interest has increased by $708.6 million in the last month to $4.52 billion.
Analog Devices (ADI)
Semiconductor stock Analog Devices is another top short seller target heading into November. Bank of America recently named Analog Devices one of its top stock picks for investors looking to play the 5G wireless network upgrade cycle. The firm anticipates Analog will have an opportunity to make significant content gains in 5G infrastructure.
Short sellers may be betting that 5G expectations are too high. Or they may be betting on a downturn in the 75% of Analog’s diversified business committed to automotive, industrial and other end markets. Finally, short sellers may simply be using Analog as a hedge against long positions in other red-hot semiconductor stocks, such as Advanced Micro Devices ( AMD) and Nvidia Corp. ( NVDA).
Analog’s short interest increased by $587.2 million in the past 30 days, according to Dusaniwsky. Analog’s short interest now stands at nearly $2.99 billion.
Alibaba Group Holding (BABA)
Alibaba is China’s e-commerce and cloud services leader. Alibaba and other U.S.-listed Chinese stocks have a lot riding on the U.S. election. President Donald Trump has made the trade war with China a centerpiece of his first term in office. A Joe Biden victory could remove a major overhang for Alibaba and other Chinese stocks.
Alibaba also has a 33% stake in Ant Group, one of China’s largest digital payment platforms. Ant Group is going public in Hong Kong and Shanghai via a planned initial public offering in early November, and early institutional demand had been extremely high. However, the IPO was suspended by the exchanges on Nov. 3.
Short sellers may be betting on a Trump election win or a rough launch for Ant. They also may be anticipating a pullback after the stock gained 20% in the past three months and more than 75% in the past year — before the news about the Ant IPO suspension.
Alibaba has the second-largest outstanding short position of any U.S.-traded stock, trailing only Tesla ( TSLA). Alibaba’s short interest increased by $570.5 million in the past 30 days and now stands at $14.97 billion.
Peloton Interactive (PTON)
Interactive fitness platform Peloton Interactive has also been a favorite target of short sellers heading into November. Peloton has been one of the biggest winners of the social distancing environment in 2020, and the stock is up more than 290% year to date. Peloton’s revenue increased 172% last quarter, while net income jumped 289% from a year ago as more Americans transitioned to working out at home rather than in public gyms.
Though Peloton shares gained as much as 20% during October, they ended up basically flat for the month, even as U.S. coronavirus case numbers spiked.
Short sellers may be betting fears over a more severe lockdown are overblown. Or they may be betting a stock that is up about 300% in 10 months is due for a significant pullback.
Peloton short interest has increased by nearly $511 million in the past month to $1.93 billion.
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