Shorts Are Piling Into These Mega-Caps, Should You Be Worried?

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Short-selling sentiment is often an underused and under-appreciated metric in the financial world. Investors that follow this activity, reported twice a month, typically focus on the percentage of a stock’s overall float that is shorted, which is always useful, but bi-monthly growth rates are also important to track. In the spirit of Insider Monkey’s "Terrible 20" list compiled last year, let’s take a look at some mega-cap companies with the biggest increases in short-selling activity of late. Each stock listed here experienced a double-digit percentage surge in short interest in mid-January and sports a market capitalization in excess of $100 billion.

Citigroup (NYSE: C)

On Jan. 15, the last FINRA short sale reporting date, Citigroup had a short interest of 33.9 million shares, good for a 29.4% increase from Dec. 31. The company issued its fourth quarter earnings just two days after the end of this filing period, whiffing on Wall Street’s estimates. On the heels of settlement costs related to its foreclosure business post-housing crash, Citi reported adjusted EPS of 69 cents, far lower than analysts’ 97 cent consensus.

In the time since, shares of the bank have traded slightly in the red, but overall declines have been minimal. Greater exposure to emerging markets gives Citigroup an obvious growth advantage over its peers, and shares still trade close to 8 times forward earnings. David Tepper's hedge fund Appaloosa Management is one of Citigroup’s biggest supporters (see David Tepper’s favorite stock picks). We’d have to side with Tepper here, and it’s not advisable for investors to let Citigroup’s increased short interest deter them in this case.

Exxon Mobil (NYSE: XOM)

Exxon, meanwhile, has recently made headlines for passing Apple in terms of market cap, but the energy behemoth actually saw a much larger increase in short interest in the latest two-week period. Between Dec. 31 and Jan. 15, the number of Exxon shares held by short sellers increased by 12.5%, while Apple’s short interest remained essentially flat. Exxon reports its Q4 earnings at the end of this week, and Wall Street is expecting EPS of $2.01 on the back of $126 billion in revenues. These figures represent year-over-year growth of 2.0% and 3.3% respectively. If the company can beat, there is room to run; shares currently trade at a 6% discount to their industry’s average.

Most analysts expect Exxon to reach these estimates, as the Brent WTI Spread was favorable in the fourth quarter. We’ll be watching this date closely, but it does appear that there are more short sellers betting on a disappointment.

Oracle (NYSE: ORCL)

Oracle is another mega-cap on our list; the technology company saw its short interest jump by 44% in the first two weeks of January. Unlike the previous two companies we’ve discussed, Oracle doesn’t report its current-quarter earnings until March. Oracle’s stock price is up more than 6% since the start of 2013, and it’s backed by several prominent money managers, including Boykin Curry, Seth Klarman and Ken Fisher (see Ken Fisher’s favorite key picks). The market has been optimistic about Oracle’s pending acquisition of marketing software company Eloqua (ELOQ), and shares don’t look too overbought at current levels. Oracle trades at 16.7 times trailing and 12 times forward EPS, but the sell-side expects earnings growth to slow dramatically over the coming years.

The company has averaged bottom line expansion of 19.3% a year over the past half-decade; early estimates predict Oracle will experience annual EPS growth of 11.8% through 2017. Moreover, Wall Street’s average price target on the stock represents an upside of around 5%, which is below peers like Intel (8.8%) and Red Hat (8.7%). It’s possible that short-sellers are focusing on these issues.

Chevron (NYSE: CVX)

Next up we have Chevron, which saw its short interest increase by nearly 14% through Jan. 15. Chevron’s next earnings report is at the end of this week, and it’s likely that this bearish activity is in anticipation of this event. The sell-side is expecting Chevron to experience impressive year-over-year revenue (8.8%) and EPS (17.8%) growth over the period, and at a PEG above 9, it’s conceivable that investors are already factoring these expectations into the stock’s price.

Merck (NYSE: MRK)

Last but certainly not least, Merck makes this list after seeing a 21.7% increase in its short interest in the first two-week period of January. The healthcare giant is looking to make its FY2012 a perfect four-for-four in terms of EPS beats; it has outpaced the Street’s estimates by an average margin of 2.4% this year and reports its Q4 earnings at the end of this week.

On a P/E basis, shares of Merck currently trade at a 14.5% premium to the (major) drug manufacturing industry’s average, so there’s a case to be made that the stock is slightly overbought. Still, a projected dividend yield near 4% gives value-conscious investors a bit of a security blanket, so it’s easy to see both sides of the argument in this case.


This article is written by Jake Mann and edited by Meena Krishnamsetty. Meena has a long position in C. The Motley Fool recommends Chevron. The Motley Fool owns shares of Citigroup Inc and Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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