Short selling has become a hot topic on Wall Street in 2021 after communities of online traders on Reddit and other social media platforms conducted a series of targeted buying campaigns in some of the market’s most heavily shorted stocks. As a result, the stock prices of so-called “meme” stocks, such as GameStop (ticker: GME), have skyrocketed this year due to a phenomenon known as a short squeeze.
Most investors buy shares of stock in the hopes that its share price will rise over time. However, short sellers take the opposite side of the trade. Short sellers identify stocks that they believe are overpriced and bet on their share prices to fall. Short sellers often target companies that they believe have businesses in terminal decline. Other times, short sellers simply bet on pullbacks in overheated momentum stocks that they believe have become temporarily overpriced.
Rising short interest can be a red flag for investors that something is seriously wrong with a company. However, it can also set up a stock like GameStop for a major short squeeze. A short squeeze is a large, short-term spike in a stock’s share price triggered when a large number of its short sellers are forced to exit their positions all at once by buying shares of stock.
Matthew Unterman, director at S3 Partners, says these five stocks are the most heavily shorted stocks of the past 30 days heading into April:
— Vici Properties (VICI)
— General Electric (GE)
— Sirius XM (SIRI)
— Discovery (DISCK)
— Bank of America (BAC)
Vici Properties (VICI)
Vici Properties is a real estate investment trust that was spun off from casino company Caesars Entertainment ( CZR) in 2017. Vici owns 28 casino properties and golf courses and leases the properties out to its operators. In 2020, Caesars accounted for more than 80% of Vici’s rental income.
Vici likely got the attention of short sellers in March when the company announced a $2.25 billion acquisition of Venetian Resorts from Las Vegas Sands ( LVS). The deal includes a 30-year triple net lease on the property with an initial annual lease rate of $250 million.
The acquisition will reportedly reduce Vici’s exposure to Caesars down to about 70%, but the company is still heavily exposed to the struggling Las Vegas Strip. Short sellers may believe Vici overpaid for the Venetian given how heavily Vegas was hit by the health crisis and the challenges Vegas faces in coming years from legalized online sports gambling.
Short sellers added 37.7 million shares to their Vici positions in the past 30 days, more than any other stock, according to S3.
General Electric (GE)
U.S. industrial giant General Electric was long considered one of the top blue chip investments in the U.S. market and was even an original component of the Dow Jones Industrial Average back in 1896.
However, GE has endured a string of negative headlines in the past five years that sent both its stock price and its reputation reeling. The company made ill-timed investments in oil and gas, was entangled in an accounting scandal and was accused of mismanaging its massive balance sheet.
In March, GE announced the latest of a series of asset sales designed to streamline its business and improve its debt situation. GE sold its aircraft leasing business to AerCap ( AER) for $24 billion in cash and a 46% stake in Aercap.
Short sellers may not have been impressed by GE’s initial 2021 guidance, or they might see the company’s recently announced one-for-eight reverse stock split as a red flag. Whatever the reason, S3 reports GE’s short interest has increased by 27.8 million shares in the past 30 days.
Sirius XM (SIRI)
Sirius XM is the U.S. market leader in satellite radio and is the parent company of audio streaming platform Pandora. Sirius XM added 909,000 self-pay subscribers in 2020, and its revenue was up 3.1% in an extremely difficult environment last year. It also has the stamp of approval of Wall Street legend and Berkshire Hathaway ( BRK.A, BRK.B) CEO Warren Buffett, who owns 50 million shares of the stock.
However, short sellers may see the satellite radio business as an antiquated model compared to the streaming services of competitors such as Spotify ( SPOT). Spotify is a pure-play on music and podcast streaming, and its revenue was up 17% in 2020.
Sirius XM’s short interest has increased by 15.8 million shares in the past 30 days, according to S3. Its short interest represents about 18.8% of the stock’s float, or free trading shares not held by institutions or company insiders. That percentage is highest among the five stocks mentioned.
Discovery is a media company and the parent of cable TV networks including Discovery Channel and Animal Planet. Discovery also launched its Discovery+ streaming service in the U.S. on Jan. 4.
In late February, Discovery reported that Discovery+ already had more than 11 million subscribers.
At one point in mid-March, Discovery shares were already up more than 150% year to date. That extreme gain likely raised eyebrows among short sellers who are well aware that Discovery reported a 4% drop in revenue and 41% decline in net income in 2020. So far, the short bets are working like a charm. Discovery shares plummeted more than 35% in the past two weeks.
The Discovery+ launch is certainly the right move in an industry that is shifting to a streaming model. However, Discovery is late to the streaming game, and it doesn’t have the content or resources to compete with Netflix ( NFLX), The Walt Disney Co. ( DIS) or others in the streaming video space.
Discovery’s short interest has increased by 15.5 million shares in the past 30 days.
Bank of America (BAC)
Bank of America has gained more than 60% since Nov. 1. Much of that investor optimism comes from expectations that interest rates will continue to rise due to inflationary pressures following unprecedented stimulus spending.
The higher interest rates rise, the higher big bank net interest margins tend to go. NIM is the difference between the interest rates banks charge on loans and the interest rates they pay on deposits.
However, in March, the Federal Reserve said it would not be extending a special exemption to bank capital requirements it put in place in April 2020 to help maintain liquidity in U.S. credit markets during the worst of the economic shutdown.
Short sellers may be betting that the expiration of the capital requirement exemption will have a larger-than-expected impact on Bank of America’s earnings. Bank of America has $3.2 billion in short interest, more than any of the other five stocks mentioned. Short sellers added 13.8 million shares to their short positions in the past 30 days, according to S3.
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