Short selling has been a hot topic on Wall Street in 2021. Communities of online traders on Reddit and other social media platforms have orchestrated targeted buying campaigns, generating unprecedented volatility in so-called “meme” stocks in an attempt to drive out short sellers.
Investors typically buy shares of stock in hopes that their prices will rise over time as the underlying company grows. Short sellers take the opposite side of that trade, betting against stocks in an attempt to profit when their share prices fall. Sometimes, short sellers identify companies that are challenged or in secular decline. Other times, they simply bet against overheated momentum stocks that they believe have become temporarily overpriced.
Rising short interest can be a red flag for an investor that something may be seriously wrong with a company. At the same time, it can also be the precursor to a major short squeeze. A short squeeze is a large, short-term spike in a stock’s share price 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 and covered stocks of the past 30 days heading into May:
— Tesla (ticker: TSLA)
— Apple (AAPL)
— Alphabet (GOOGL)
— Microsoft Corp. (MSFT)
— Amazon.com (AMZN)
For years, electric vehicle maker Tesla and its controversial CEO Elon Musk have been one of the most divisive subjects on Wall Street. Tesla bulls see Musk as the premier visionary of his generation and Tesla as the future of global mobility. Tesla bears and short sellers point to Musk’s long track record of overpromising and underdelivering and highlight Tesla’s extreme valuation premium relative to other auto and tech stocks.
Tesla recently reported impressive 74% revenue growth in the first quarter. However, short sellers likely focused on the fact that without regulatory credit sales and profits from Bitcoin trading, Tesla would have generated a net loss in the quarter.
Tesla is by far the most heavily shorted stock in the entire U.S. market. Tesla has $35.5 billion in total short interest. Tesla short sellers are digging in heading into May, adding $4 billion to their bearish bets in the past 30 days, according to S3.
Apple recently reported some mind-blowing first-quarter numbers, including $89.5 billion in revenue, up 53.7% from a year ago. Apple also authorized a new $90 billion in share buybacks as it works toward its long-term goal of becoming net cash neutral.
Unfortunately, Apple has also been the subject of some negative headlines out of Europe in recent days. In late April, Russian regulators fined Apple $12 million for antitrust abuses related to its app store, and regulators in Europe have now ruled that Apple has a monopoly in the music streaming app business.
Short sellers may believe more significant regulatory crackdowns will weigh on Apple’s share price. Alternatively, they may simply be betting on a healthy pullback from the stock after it gained 70% in the past year.
Whatever the reason, Apple’s short interest increased by $3.6 billion in the past 30 days and now stands at $17.2 billion.
Google parent company Alphabet also reported some impressive earnings and revenue numbers in the first quarter. YouTube advertising revenue was up 50% from a year ago to more than $6 billion, and high-margin Google Cloud revenue was up 46% to more than $4 billion.
Like Apple, Alphabet also announced a new $50 billion share buyback program.
If short sellers are concerned about regulatory crackdowns, Alphabet is certainly another reasonable target. The company is currently the subject of several lawsuits by the U.S. Justice Department and individual U.S. states, as well as investigations by international regulators.
Short interest in Alphabet’s Class A shares increased by $3 billion in the past 30 days. Short interest in its Class C shares was also up by $447 million, bringing its total short interest to around $17.6 billion.
Microsoft Corp. (MSFT)
Microsoft is another large-cap tech stock that has carried its 2020 momentum over into 2021. Microsoft recently reported 19% revenue growth in its fiscal third quarter, its highest-growth quarter since 2018. The company’s Azure public cloud revenue was up 50%, while its Xbox gaming content and services revenue grew 34%.
Microsoft’s numbers were impressive, but the stock initially traded lower following its earnings report. Microsoft may be the victim of even bigger earnings beats by other big-name tech stocks. Or sellers may be taking profits after the stock gained 35% in the past year.
Short sellers also often use short positions in large-cap, blue-chip stocks like Microsoft as a way to hedge against long positions in higher-growth tech plays.
Regardless, Microsoft’s short interest has increased by $3.4 billion in the past 30 days to $15.7 billion, according to S3.
From its online retail sales to its cloud services to its Whole Foods grocery delivery, virtually every aspect of Amazon’s business benefited from the social distancing environment in 2020. So far, that positive momentum has carried over into 2021 as well.
Amazon recently reported $108.5 billion in revenue in the first quarter, up 44% from a year ago. Amazon Web Services’ cloud revenue was up 32% to $13.5 billion, while online retail sales climbed 44% on the quarter to $52.9 billion.
Short sellers may believe Amazon’s stock is due for a pullback, they may be concerned about regulatory crackdowns or they may believe Amazon’s business was so strong in 2020 that there’s no way it can maintain its growth in coming quarters.
Amazon is the only stock other than Tesla to have at least $20 billion in total short interest. In the past 30 days, short sellers increased their bets against Amazon by $3 billion, pushing its total short interest to $20.7 billion.
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Update 05/06/21: This story was published at an earlier date and has been updated with new information.