Buyers Beware: 4 Stocks with Increased Short Selling
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In today’s unstable market environment, it’s crucial that investors consider a stock’s short interest before buying. An amplified number of shorting typically means that Wall Street has grown less fond of that particular stock. Overselling, though, sometimes has a positive effect on stock price, as short sellers may be forced to cover their positions. Below are four companies that have seen increased short interest in recent weeks.
Bank of America (NYSE: BAC)
In 2012, this banking giant has drawn the ire of everyone from Occupy Wall Street to the voters of the “Worst Company in America” award. To see how Bank of America fared in this contest, visit here. From an investing standpoint, BAC has been quite the bear since the recession, losing nearly 40 percent of its total value, compared to a positive return of 5.1 percent for the financial sector as a whole. Moreover, the company’s annual revenues have shrunk by 28 percent since 2009, falling to $93.5 billion last year. Over this same time, competitors like JPMorgan (-3.2%), Wells Fargo (-8.7%), Citigroup (-2.4%), and US Bancorp (14.7%) have all fared better.
Additionally, Bank of America’s free cash flow has been squeezed tighter than most of its peers, wilting by 55.6 percent between 2009 and 2011. Now, the bank did blow away analysts' first quarter earnings expectations with an EPS of $0.31, but in the month since, short interest surrounding BAC increased by 16.4 percent. The stock still has a relatively low short percentage of float – aka tradable shares – of 1.4 percent, but this situation is definitely worth monitoring.
Zynga (NASDAQ: ZNGA)
The leading gaming-app developer in the marketplace today, Zynga has seen its short interest skyrocket recently. Between April 13 and May 15, short selling activity more than doubled, hitting a post-IPO high of 56.6 million shares. More troublingly, over one-third of Zynga’s tradable shares are currently shorted. With such a high short percentage of float, ZNGA is currently at a level only seen by a small fraction of all other publicly traded stocks. Interestingly, the company actually beat the Street’s first quarter earnings estimates, though there is a growing concern about its overreliance on revenue from mobile users, who are less profitable than traditional gamers. Going forward, Zynga is also facing a shrinking free cash flow, which fell by 45 percent last year.
Coca-Cola (NYSE: KO)
As the favorite of magnate Warren Buffett – he holds nearly a fifth of his portfolio in KO – this stock looks poised to be a great investment over the long run. Whether it’s Coca-Cola’s bevy of profitable brands, or its global distribution chain, there is a lot to like about the soft drink company. Over the past month, though, shares have slid almost 4 percent, and short interest has been rising. Specifically, the number of investors shorting KO rose by 35.9 percent between April 13 and May 15. Moreover, the stock looks slightly overvalued at the moment, trading at a P/E (19.7X) and P/CF (18.2X), above the industry averages of 18.5X and 15.7X, respectively. When growth is factored into the equation, a similar story is told, as KO sports a PEG ratio of 2.1 and a PCFG ratio of 2.6. Typically, any number above 2.0 signals that a stock may be overvalued. The computation of the PCFG ratio, which is a concept similar to the PEG, was based on the company’s 5-year historical operating cash flow growth rate.
Google (NASDAQ: GOOG)
Despite GOOG’s shoddy market performance in 2012 – it’s down over 10 percent YTD – it is still a shocker to see more short selling on a stock with booming earnings growth and attractive valuation metrics. Specifically, short interest has increased by 36.6 percent in the past month. With over 4 million shares currently being shorted, GOOG is at a level not seen since last December, though this still represents a small percentage of Google’s float (1.6%). Going forward, investors should still feel bullish about the stock, as it has superior 3-year historical EPS (30.8%) and free cash flow (34.2%) rates, while sporting price multiples that are below industry averages. If analysts' year-end earnings estimates of $37.53 a share hold, GOOG will rise above $800 by next summer assuming that valuation metrics remain at current levels.
Short selling activity is released in the first and third weeks of every month, so investors would be wise to continually monitor the bearish sentiment surrounding their holdings. To learn more about this and other investing topics, continue reading here.
Fool blogger Jake Mann does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of Bank of America, Google, and The Coca-Cola Company. Motley Fool newsletter services recommend Google and The Coca-Cola Company. 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. If you have questions about this post or the Fool’s blog network, click here for information.