After a horrendous start to the year, the S&P 500 finished 2020 at an all-time high, up more than 15% on the year. But with stocks already pricing in a significant economic recovery, short sellers are betting 2021 may not live up to expectations.
Investors typically buy stocks in the hopes of profiting from their rising share prices. Short sellers take the opposite side of the trade and profit when stock prices fall. Sometimes, short sellers identify companies they believe have fundamentally flawed business models. Other times, they simply bet on pullbacks from stocks that they believe have become overheated after big rallies.
Rising short interest can be a red flag for investors, but a large short interest can also potentially serve as a bullish catalyst for a stock. Short squeezes are temporary stock price spikes that occur when a large number of short sellers exit their positions all at once by buying shares.
S3 Partners analyst Ihor Dusaniwsky says these five stocks have been getting the most attention from short sellers heading into January:
— Intel Corp. (ticker: INTC)
— Apple (AAPL)
— Salesforce.com (CRM)
— Snowflake (SNOW)
— Qualcomm (QCOM)
Semiconductor stocks Advanced Micro Devices ( AMD) and Nvidia Corp. ( NVDA) are among the top-performing stocks in the entire S&P 500 in 2020. But unfortunately for Intel investors, 2020 was another lackluster year for the legacy chipmaker.
AMD and Nvidia shares both doubled in 2020, but Intel shares dropped about 15%. One of the biggest blows of the year came in July, when the company announced yet another round of problems and delays with its 7-nanometer chips. Intel shocked Wall Street when it said it may even be forced to rely on a third-party manufacturer to keep up with its competitors.
Tech investors aren’t looking to invest in a company with inferior products that is losing market share, so it’s understandable why short sellers are betting against Intel. Intel’s short interest has increased by $1.19 billion in the past 30 days to $3.68 billion, according to Dusaniwsky.
Apple had another spectacular year in 2020, gaining about 80% on the strength of investor enthusiasm for a global 5G iPhone upgrade cycle. Apple recently surged to all-time highs following reports that the company is developing a self-driving car.
Next-generation auto stocks like Tesla ( TSLA) and Nio ( NIO) were top market performers in 2020, so it’s understandable why traders would react positively to the Apple rumors. But while Apple certainly has the resources to compete in the auto market, analysts were quick to point out that Apple is already at a significant data-gathering disadvantage to autonomous vehicle market leaders such as Alphabet ( GOOG, GOOGL) and General Motors Co. ( GM).
Apple short sellers may not be buying the EV hype. Or they may simply think Apple’s valuation is a bit too rich at a market capitalization of $2.13 trillion. Whatever the reason, short sellers have increased their net position in Apple by $1.11 billion in the past 30 days, bringing the stock’s total short interest up to $13.26 billion.
For the second straight month, Salesforce has been one of the five most heavily shorted stocks on Wall Street. A rise in remote work has been great for Salesforce’s cloud-based customer relationship management software business in 2020, and its stock price has soared. However, Salesforce short sellers may be focusing on the company’s aggressive November buyout of workplace communication platform Slack Technologies ( WORK).
On Dec. 1, Salesforce announced a $27.7 billion buyout of Slack, by far its largest acquisition ever. Salesforce shares are down about 12% since the Slack rumors started circulating in mid-November. Short sellers may believe Salesforce overpaid in a deal valuing Slack at a steep 24 times projected 2021 sales.
Salesforce’s short interest has increased by $941.2 million in the past 30 days and now stands at $4.19 billion, according to S3.
Cloud database specialist Snowflake was valued at about $33 billion when it conducted its high-profile initial public offering in September. After initially targeting an IPO price in the $75 to $85 range, Snowflake ultimately priced its IPO at $120 per share.
Roughly three months later, Snowflake shares are trading at around $300, a price-to-sales ratio of about 160. For some perspective, cloud services leader and high-growth tech stock Amazon.com ( AMZN) trades at just 4.8 times sales.
Overhyped tech IPOs have a long history of underperforming following an initial buying frenzy. Short sellers are likely betting that enthusiasm for Snowflake’s IPO has pushed its valuation to an unsustainable level.
Snowflake’s short interest increased by $656.5 million in the past 30 days to $3 billion. Snowflake’s short interest also represents 21.7% of the stock’s total float, the free-trading stock shares not held by institutions or company insiders. Snowflake’s short percentage of float is about 10 times higher than the other four stocks on this list.
Qualcomm is a leading mobile device chipmaker and major iPhone supplier. The stock rose right alongside Apple in 2020 on investor optimism for the global rollout of 5G wireless networks and corresponding connected devices.
However, Qualcomm investors got some potentially troubling news in December when Bloomberg reported Apple has started building its own in-house cellular modem. The news comes after Apple purchased Intel’s modem business for $1 billion in 2019.
Apple makes up more than 10% of Qualcomm’s total revenue, so news of the iPhone maker’s big investments in its own modems is dangerous for Qualcomm. If Apple ultimately reduces or eliminates its reliance on Qualcomm’s products, it may be impossible for Qualcomm to replace the lost revenue from such a large customer.
Short sellers may be betting Apple reduces its reliance on Qualcomm components, or they may simply be betting the uncertainty of the situation will weigh on Qualcomm shares. Either way, the stock’s short interest is up by $643.7 million in the past 30 days to $2.65 billion.
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