Short selling has been a hot topic on Wall Street in 2021. In recent weeks, communities of online stock traders on Reddit and other social media platforms have once again created extreme volatility in so-called “meme” stocks such as AMC Entertainment Holdings (ticker: AMC) and GameStop Corp. ( GME) in an attempt to drive out short sellers.
Investors typically buy shares of a stock that they believe will become more valuable over time as the underlying company grows. Short sellers take the opposite approach, betting against stocks that they believe are overpriced. Sometimes, short sellers target companies that have challenged business models or difficult outlooks. Other times, they bet against momentum stocks that they believe have become overheated and overvalued after big gains.
Rising short interest can be a red flag for investors that there is something seriously wrong with a company. Or, it can be a precursor to a short squeeze — a large, short-term spike in a stock triggered when the market forces short sellers 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:
— Snowflake (SNOW)
— Salesforce.com (CRM)
— S&P Global (SPGI)
— DraftKings (DKNG)
— Virgin Galactic Holdings (SPCE)
In less than nine months since data analytics specialist Snowflake went public via an initial public offering, the stock has roughly doubled its $120 per share IPO price. Snowflake recently reported yet another quarter of impressive growth numbers, including 110% revenue growth, 206% remaining performance obligations growth and 168% net revenue retention rate.
The potential problem with Snowflake that short sellers may have identified doesn’t seem to be related to the health of the company’s underlying business. It may simply be a bet on the stock’s bearish momentum since it peaked at an all-time high of $429 back in December 2020. Extremely high expectations appear to already be priced into Snowflake’s stock at this point, and short sellers may believe it will be impossible for the company to live up to the hype or maintain its current growth trajectory for much longer.
Snowflake’s short interest increased by $1.04 billion to $2.3 billion over the past 30 days, making it the only U.S. stock that gained more than $1 billion in short interest in that stretch.
Cloud customer relationship software leader Salesforce.com is another tech stock that has been trending in the wrong direction since it hit an all-time high of $284.50 back in September 2020. Short sellers betting on a post-earnings sell-off were sorely disappointed last week when Salesforce reported accelerating revenue growth and issued full-year guidance that exceeded Wall Street’s expectations.
Salesforce shares jumped more than 5% after the company reported 23% first-quarter revenue growth, 11% core Sales Cloud product revenue growth and 27% current remaining performance obligation growth in the first quarter. In addition, Salesforce guided for 22% revenue growth in fiscal 2022 and said it expects full-year adjusted operating margins of 18%.
Salesforce short sellers may be hoping the earnings rally is short-lived, or they may have simply made a bad call ahead of the impressive earnings report. Regardless of the reason, Salesforce’s short interest is up by $734 million in the past 30 days and stands at $5.9 billion heading into June.
S&P Global (SPGI)
S&P Global is a financial services company that specializes in credit ratings, which account for nearly half of its total revenue. The company also provides market intelligence and research services and energy and commodity market data. Finally, S&P Global owns the S&P 500 index and the Dow Jones Industrial Average via a joint venture.
Over the long term, S&P Global has been one of the most steady, reliable dividend stocks in the market, which makes it a curious short seller target at first glance. However, the latest U.S. inflation readings have some investors growing increasingly concerned about the potential for rising interest rates in coming quarters. Higher interest rates typically result in less corporate debt issuance, which could take a major bite out of S&P Global’s credit ratings revenue.
Short sellers may see S&P Global as a bet on out-of-control inflation. The stock’s short interest is up by $532 million in the past month and now stands at $5.4 billion.
DraftKings is an early market leader in the nascent U.S. online sports betting and iGaming markets. The company’s three primary businesses are daily fantasy sports, online sports gambling and online casino gaming.
DraftKings has reported some extremely impressive growth numbers as U.S. online sports gambling has been legalized on a state-by-state basis. In the first quarter of 2021, DraftKings reported 175% year-over-year revenue growth and 1.5 million average monthly unique players — more than double its total from a year ago.
However, even after a significant pullback in recent months, DraftKings shares still trade at more than 24 times sales. In addition, the company isn’t profitable, reporting a $346.3 million net loss last quarter.
Short sellers may believe a return of live entertainment options this summer will siphon disposable income away from online gambling. Or they may be eyeing online gambling competition from MGM Resorts International ( MGM), Penn National Gaming ( PENN), Wynn Resorts ( WYNN) and others.
DraftKings’ short interest increased by $532 million in the past 30 days and now stands at $1.8 billion.
Virgin Galactic Holdings (SPCE)
Space tourism stock Virgin Galactic has been on a wild ride so far in 2021. After hitting $62.80 in early February, Virgin shares came crashing back to earth when the company announced it would be delaying February test flights until May. The news came after Virgin’s test flight in December 2020 was aborted when the onboard computer lost its connection.
Fortunately for Virgin investors, the May test flight was ultimately successful, sending Virgin shares soaring to close out the month.
Short sellers may have been betting the May test flight would be aborted or fail, or they may have piled into the stock in the past several days to fade the post-flight rally.
Virgin’s short interest has increased by $487 million in the past 30 days and has grown to $1.5 billion. About 23% of Virgin’s total float, or free-trading shares not held by institutions or company insiders, are currently held in short positions — by far the highest percentage of any of the five stocks mentioned here.
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