Short selling has been a hot topic on Wall Street so far this year after groups of online retail traders on Reddit and other social media platforms launched targeted buying campaigns in some of the most heavily shorted stocks in the market. As a result, short squeezes in GameStop (ticker: GME) and other so-called “meme” stocks have sent share prices skyrocketing and even prompted controversial buying restrictions by Robinhood and other trading platforms.
Investors typically buy stock in the hopes its share price will rise over time, but short sellers take the opposite side of the trade. Short sellers identify stocks they believe are overpriced and bet on share prices to fall. Sometimes they target companies they believe have flawed business models. Other times, short sellers simply bet against momentum stocks that may have become overpriced.
Rising short interest can be a red flag for investors, but it can also be a recipe for a short squeeze. A short squeeze is a large spike in share price that occurs when short sellers are forced to exit their positions all at once by buying shares of stock.
S3 Partners analyst Ihor Dusaniwsky says these five stocks are the most heavily shorted stocks of the past 30 days heading into March:
— International Flavors & Fragrances (IFF)
— DuPont de Nemours (DD)
— Amazon (AMZN)
— AstraZeneca (AZN)
— Carnival (CCL)
International Flavors & Fragrances (IFF)
Following a February merger with DuPont de Nemours Nutrition & Biosciences business, International Flavors & Fragrances is expected to be either the largest or second-largest global supplier in the taste, scent, nutrition, cultures, enzymes, probiotics and soy protein categories. Following the merger’s completion on Feb. 1, International Flavors shares initially jumped 16%.
Analysts say the merger will help International Flavors expand its dominant market share lead in key international categories, and deal synergies could help reduce costs. Short sellers appear to be extremely skeptical of the positive impact of the merger deal for both parties. Both DuPont and International Flavors were among the most shorted stocks in the market in January and February of 2021, according to S3.
International Flavors’ short interest increased by $698 million in the past 30 days, more than any other stock in the U.S. market. The stock’s short percentage of float, the ratio of its short interest to its total free-trading shares, now stands at 16.2%, the highest among the five stocks mentioned.
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. DuPont investors had the option to convert some or all of their shares in the Nutrition & Biosciences spinoff business to shares of DuPont before the completion of the International Flavors merger.
As part of the deal, DuPont received $7.3 billion in cash, $5 billion of which it will use to pay down debt and improve its balance sheet. Management is also reportedly pursuing a pair of small acquisitions and is willing to spend up to $2.5 billion on the deals. The market appears to see DuPont as the loser in the unconventional Nutrition & Biosciences spinoff deal given the stock dipped significantly since the deal finished.
S3 reports DuPont’s short interest has increased by $593 million in the past 30 days. The stock’s short interest has skyrocketed in the past two months from $1.9 billion to $4.3 billion.
While many companies struggled in 2020, Amazon has been one of the top performers throughout the health crisis. Thanks to the company’s dominant share of the e-commerce and cloud services markets, Amazon shares are up more than 50% from a year ago. In the most recent quarter, Amazon’s revenue topped $100 billion for the first time, up 44% from a year ago.
Short sellers may believe an end to the health crisis will put Amazon in a difficult position in 2021 given it will be facing extremely difficult year-over-year comparisons. They may also believe the stock is due for a breather after such a strong run. Also, short sellers often use short positions in mega-cap tech stocks such as Amazon as a hedge against long positions in other tech stocks as well.
Whatever the reason, Amazon has an outstanding short position of $10.9 billion, nearly twice as large as any other stock on this list. Amazon’s short interest has increased by $587 million in the past 30 days, according to S3.
Like most other large-cap pharmaceutical companies, AstraZeneca made headlines throughout 2020 for its work developing a COVID-19 vaccine. Unfortunately, while the world works to roll out FDA-authorized vaccines produced by competitors such as Pfizer ( PFE) and Moderna ( MRNA), AstraZeneca’s rollout hasn’t gone quite as smoothly.
South Africa recently halted the distribution of AstraZeneca’s vaccine candidate after data suggested it wasn’t very effective against the South African B.1.351 variant of the virus.
AstraZeneca shares have gone nowhere so far in 2021, dropping slightly year to date. Even if it eventually gets its vaccine to market, AstraZeneca has said it does not intend to turn a profit on it and has committed to selling it for $4 or less compared to the $19.50-per-dose cost of the Pfizer vaccine.
Short sellers may be using AstraZeneca to hedge against long positions in other vaccine stocks. AstraZeneca’s short interest has increased by $520 million in the past 30 days.
The cruise industry was among the businesses that were hardest hit by the health crisis. While most industries are finally beginning to claw their way back to normal in early 2021, Carnival just announced that it is extending its shutdown of all cruises until at least June 1.
At this point, Carnival has not been doing business for nearly a year now, as evidenced by its 99.3% drop in revenue in the fourth quarter. Yet incredibly, Carnival’s stock price is up more than 200% from its March 2020 lows.
Short sellers likely believe Carnival shares are simply pricing in too much optimism after gaining more than 40% year to date in 2021. With business completely shut down until summer, there’s no chance Carnival’s business will be back to anything approaching normal until at least 2022. Even then, there’s no guarantee Carnival’s customers will return in 2022 or beyond.
Carnival’s short interest increased by $517 million in the last 30 days and now stands at $2.1 billion, according to S3.
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