Short selling has gotten a lot of attention in recent weeks after online retail trading communities on Reddit and other social media platforms triggered a series of short squeezes in several popular stocks. These short squeezes have created unprecedented volatility in GameStop Corp. (ticker: GME) and other highly shorted stocks and even prompted controversial trading restrictions by online brokers like Robinhood.
Investors typically buy stocks in the hopes that their share prices will rise over time, but short sellers take the opposite side of the trade. Short sellers profit when stock prices fall. Sometimes they identify companies they believe have flawed or broken businesses, while other times they simply bet against stocks they believe have become overpriced after large rallies.
Rising short interest can be a red flag for investors, but it can also be a bullish catalyst for a short squeeze. A short squeeze is a spike in a stock’s share price that occurs when a large number of short sellers are forced to exit their positions all at once by buying shares.
S3 Partners analyst Ihor Dusaniwsky says these five stocks are the most heavily shorted stocks of the past 30 days heading into February:
— DuPont de Nemours (DD)
— International Flavors & Fragrances (IFF)
— Apple (AAPL)
— Advanced Micro Devices (AMD)
— AstraZeneca (AZN)
DuPont de Nemours (DD)
DuPont de Nemours is a global chemical company that produces materials used in electronics, transportation, construction, health care and other industries. In recent weeks, short sellers appear to have zeroed in on an unconventional spinoff of DuPont’s Nutrition & Biosciences business, which was scheduled to complete on Feb. 1. Under the terms of that spinoff, DuPont shareholders had the option of converting some or all of their shares in the new entity to DuPont shares before Nutrition & Biosciences’s subsequent merger with International Flavors & Fragrances.
When it comes to transactions like this one, it’s common for short sellers to see one of the entities as a winner and one as a loser, but short sellers have been targeting both DuPont and International Flavors aggressively in the past month. In fact, DuPont’s short interest has increased more than any other stock in the past 30 days. S3 reports DuPont’s short interest more than doubled in that time from $1.86 billion to $3.89 billion.
International Flavors & Fragrances (IFF)
If short sellers see DuPont as a loser from the spinoff of its Nutrition & Biosciences business, they certainly don’t see International Flavors & Fragrances as the winner. Following the merger with Nutrition & Biosciences, International Flavors is expected to be either the largest or second-largest global producer in the taste, scent, nutrition, cultures, enzymes, probiotics and soy protein categories.
Analysts say the acquisition could create cost savings opportunities and will help International Flavors increase its dominant share in key markets. However, short sellers don’t seem convinced. International Flavors shares have already lagged the S&P 500 significantly over the past year, declining about 14% heading into the merger date.
The stock’s short interest increased by $1.68 billion to $3.96 billion in the month leading up to the Nutrition & Biosciences deal. International Fragrance’s short percentage of float, the ratio of its short interest to its total free-trading shares, now stands at 32.3%, by far the highest percentage among the five stocks on this list.
Apple had another spectacular year in 2020, gaining about 77% on the year on investor enthusiasm for a global 5G iPhone upgrade cycle. The company also got off to a strong start to 2021, reporting blowout fiscal first-quarter numbers in January.
Apple generated $100 billion in quarterly revenue for the first time, and its $65.6 billion in iPhone sales exceeded consensus analyst estimates by nearly 10%. Investors are also optimistic about recent reports that Apple is developing a self-driving car, and the company certainly has the resources to compete with General Motors Co. ( GM), Alphabet ( GOOG, GOOGL) and other leading competitors in the space.
Given Apple’s impressive first-quarter sales numbers, short sellers may simply be betting that the stock got a bit ahead of itself in 2020 because Apple’s market capitalization now stands at around $2.2 trillion. So far in 2021, they may be right. Apple shares were down about 0.5% in January. The stock’s short interest increased by $1.65 billion to $14.18 billion in the past 30 days.
Advanced Micro Devices (AMD)
Under the leadership of CEO Lisa Su, semiconductor company AMD has shaken its reputation for subpar technology and gained significant market share from competitors Intel Corp. ( INTC) and Nvidia Corp. ( NVDA). AMD also just previewed its next-generation EPYC processor, which could help the company gain more ground on Intel.
AMD’s tremendous success in recent years has made the stock one of the best investments in the market. However, with AMD shares up about 4,000% in the past five years, short sellers may be a bit skeptical of the stock’s valuation and the market’s high expectations.
In fact, AMD investors got a bit of a reality check in January when the stock finished the month down about 7% despite reporting 53% year-over-year revenue growth in the fourth quarter.
Short sellers may also be betting that 2021 is the year Intel finally gets its act together after years of lagging technology and production issues.
Whatever the reason, short sellers added $1.43 billion to their bets against AMD in the past 30 days. AMD now has nearly $6.7 billion in short interest.
AstraZeneca is a large-cap pharmaceutical company that made headlines in 2020 for developing a coronavirus vaccine candidate. Unfortunately for AstraZeneca investors, the stock and its vaccine have lagged the competition. The U.S. Food and Drug Administration has authorized vaccines produced by Pfizer ( PFE) and Moderna ( MRNA) for emergency use, but AstraZeneca’s candidate is still in clinical trials.
Despite the massive global demand for vaccines, AstraZeneca shares are up just 3% in the past year. One of the main reasons why investors are dismissing the vaccine is because the company has said it does not intend to make a profit off the vaccine during the health crisis and will prioritize distribution by selling it for $4 or less compared with $19.50 per dose for Pfizer’s vaccine.
Short sellers may be using AstraZeneca as a hedge against other vaccine stocks. The stock’s short interest is up by nearly $1.1 billion in the past 30 days to almost $2.7 billion.
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