Buyers Beware: 5 Stocks That Short Sellers Love
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One metric that goes oft overlooked in the investing realm is short-selling activity. While not always a cut-and-dry bearish signal, it does give investors insight into the negative sentiment surrounding a stock. In some cases, stocks with a very high short percentage of float – aka tradable shares – can bounce upwards, as shorters are forced to cover their positions. Known as a ‘short squeeze’, some speculators make a living capturing these short-term price movements, though it’s not a strategy for the faint of heart. Below are five stocks that have a short percentage of over 30 percent; this is typically regarded as the ‘Mendoza Line’, so to speak. Investors must stringently evaluate companies above this level before a position is taken.
Pandora Media (NYSE: P)
A favorite of tune-loving teens everywhere, Pandora is an ad-supported web radio service that is free to use. While the company also offers pay-to-play premium memberships, this service has not proven to be a serious source of revenue. Since going public in June of 2011, the stock has lost nearly half of its value, and that’s just the start of this proverbial pain train. As of May 31st – shorters are required to report their positions to the SEC on the second and fourth weeks of every month – Pandora sported a troubling short percentage of 33.70 percent.
Over the past month, in fact, the number of short sellers surrounding shares of P grew by nearly 13 percent to hit a post-IPO high. This may be tied to the earnings difficulties the company is having; execs reported a loss of 12 cents a share last quarter, though ad and subscription revenues rose by 62 and 38 percent respectively. Going forward, Pandora also faces stiff competition from Spotify and Sirius XM, so this situation is definitely worth monitoring further.
Tesla Motors (NASDAQ: TSLA)
With over half of its float currently shorted by bears – 51.9 percent to be exact – Tesla Motors is a prime candidate for a short squeeze. In the past year, the short sellers have slowly begun to circle like buzzards, increasing total holdings from 15.9 million to 25.9 million shares. Their efforts appear to be in vain thus far, as TSLA actually gained almost 5 percent in this same time. In it most recent earnings release, the electric car manufacturer reported a first quarter loss of $89.9 million, though automobile orders were higher than expected. Tesla is planning to release its Model S sedan – self-anointed as “the world’s first premium electric sedan” – in June. It already has 10,000 orders on file, and expects to release an electric luxury SUV by 2014. Until its cars begin to make their way out of production and into consumers’ driveways, Tesla stock will be driven by expectation, not traditional metrics like earnings or free cash flow.
Coinstar (NASDAQ: CSTR)
As mentioned in this article, Coinstar is busy building an army of automated kiosks that will do everything from serve coffee to rent movies. Riding the success of its Redbox franchise, in which annual same-kiosk sales growth has surpassed 20 percent since the recession, Coinstar has more than doubled its earnings over this same time. Despite this success, 31.1 percent of the stock’s float is currently shorted. With a days-to-cover ratio above 8, it is unlikely that shorters would be able to fully unload their positions to capitalize on an upward swing in stock price – this can be interpreted as a bearish signal. Interestingly, shares of CSTR have gained 7 percent in the past month, and currently sport P/E and P/CF ratios below industry averages.
Boston Beer Company (NYSE: SAM)
The brewer of high-quality beer, most notably Sam Adams Boston Lager (my personal favorite), the Boston Beer Company has been publicly traded since 1995. An investor that purchased $10,000 worth of SAM in the mid nineties would currently be sitting on roughly $110,000. Notably, most of this growth has occurred since the end of the 2008 recession, in which the stock rose from the $20 a share range to its current price of $110. Thanks to an increased demand for the ‘good stuff’ as beer drinkers like to call it, Boston Beer has cultivated its earnings at a quicker clip than larger competitors like Anheuser-Busch Inbev and Molson Coors Brewing Company. In the first quarter, Boston Beer reported a year-over-year earnings jump of 89 percent, citing increased popularity of seasonal beers and slight price hikes. Looking ahead, analysts expect a year-ahead EPS of $4.13, a decent growth from last year’s $3.73 figure. Interestingly, short sellers are have been pessimistic. At the end of May, 43.4 percent of SAM’s 8.3 million shares outstanding were shorted; this represents an increase of nearly fivefold since last summer.
Vera Bradley (NASDAQ: VRA)
As a popular manufacturer of women’s handbags, Vera Bradley has seen its top line grow by 24.5 percent per annum since the recession. Over this same time, earnings have followed suit, though shares of VRA have remained essentially flat. Currently, over 35 percent of the company’s float is short sold, and this has been increasing significantly; the number of investors short VRA has spiked by 140 percent since last summer. With a days-to-cover ratio above 6, further pessimism is warranted. In late May, Vera lowered its second quarter earnings guidance from $0.39 a share to $0.35; the stock fell five percent over the next week. The company reports its Q2 results later this summer.
While short selling is an important indicator to consider, it is not a sole justification to initiate a transaction. As mentioned above, changes in shorting activity can result in both bullish and bearish price movements, depending on a range of factors. For investors who already hold these stocks in their portfolios, this information is definitely important to keep an eye on. For more information about shorting activity and other trading ideas, visit WealthLift’s INSIDER blog today.
WealthLift has no positions in the stocks mentioned above. The Motley Fool owns shares of Boston Beer and Tesla Motors. Motley Fool newsletter services recommend Boston Beer and Tesla Motors . 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.