Buyers Beware: 4 Stocks With Heavy 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 the financial world, there are a gazillion types of analytical indicators, ranging from P/E ratios to dividend yields. One metric that is often overlooked, however, is short selling activity. For those in need of a refresher course on short selling, see this article. Reported twice a month, shorting activity is a crucial measurement of the bearish sentiment that surrounds a particular stock. There are two ways that investors can track this: (1) the percentage change in shorting activity between time periods, or (2) the overall fraction of a stock’s float (tradable shares) that are currently shorted. The latter is also known as ‘short interest.'
In most cases, this is the most important indicator of the two. For example, a stock like Apple could see a 50 percent jump in month-to-month shorting activity, but this wouldn’t mean much considering that its short interest is just 1.60 percent. Thus, it is crucial to monitor stocks with a high short interest – typically anything over 30 percent is a warning sign. Now, this may seem straightforward enough, but it must be understood that a short interest above 50 percent can preclude a ‘short squeeze,' in which short sellers are forced to buy back their positions. While this seems complicated, it is essentially a situation straight out of Econ 101, where a lack of supply and excess demand force prices upwards. Below are four stocks that have a short interest between 30 and 50 percent, demonstrating a clear bearish signal.
Ancestry.com (NASDAQ: ACOM)
Since going public in late 2009, Ancestry.com’s stock has returned 104.0 percent, riding solid revenue generation (26.5%) and stratospheric earnings growth (178.1%) on an annual basis. The company itself is the largest for-profit genealogy researcher in the world, providing a relatively unique service to its customers. As of this year, Ancestry.com holds over 8 billion historical records and 31 million family trees, to which its 1.7 million subscribers pay an average of $160 a year. In late May, ACOM beat the Street’s revenue and earnings expectations, while announcing its acquisition of Archives.com for $100 million.
Despite these positive signals, short sellers are having a field day with the stock, as its short interest is currently 34.9 percent. In fact, short selling activity has increased by nearly 30 percent year-to-date. With a days-to-cover ratio above 8, it’s likely that short sellers would be unable to fully discharge their holdings in the event of a price upswing – this can be interpreted as a bearish signal. One reasoning behind this negative sentiment may be that ACOM’s earnings growth is slowing down. While it grew EPS by 69.7 percent last year, 2012 (25.4%) and 2013 (21.8%) estimates are significantly lower.
Buckle, Inc. (NYSE: BKE)
As a retailer of higher-quality clothing for men and women, Buckle has achieved modest growth post-recession, raising its revenues (10.3%) and earnings (12.6%) faster than the apparel industry’s averages of 4.1 and 6.3 percent respectively. From a valuation standpoint, BKE’s earnings are trading at a discount, as its P/E (12.1X) is below its 5-year historical average (12.8X), and those of its competitors. When growth is factored into the equation using the PEG ratio, a slightly different story is told; the stock’s PEG ratio of 1.0 signifies it is fairly valued.
In the land of short sellers, BKE’s sentiment is bearish. The stock has a short interest of 45.1 percent and currently rests at a level of shorting only seen in the top one percentile of all publicly traded stocks. Over the past month, short selling activity on BKE is up nearly 15 percent, and 38.2 percent since the recession. Moreover, this stock has a days-to-call ratio north of 15, which is more bad news. Investors would be wise to monitor this situation closely, as the company reports its next earnings results in August. Check here for updates.
J.C. Penney Co. (NYSE: JCP)
With a fresh new management team headed by CEO Ron Johnson, the future for J.C. Penney looks bright - if you believe that their changes to the pricing system and store layouts will be successful. Regarding the former, Johnson noticed that almost everything on JCP’s sales floor was discounted to some degree, forcing customers to coupon-hunt to make purchases. Earlier this February, the company revamped this strategy with its ‘Fair and Square’ campaign, designed to lower prices altogether, instead of relying on sales-heavy periods like Christmas and Labor Day.
So far, this shift has underwhelmed, as the company reported a first quarter loss of $0.75 a share, compared to a positive EPS of $0.28 just one year earlier. It appears that J.C. Penney’s customer base was shopping at the chain because of the discounts, and without them, there is little incentive not to go to brick and mortar competitors like Target or Wal-Mart. Now, Johnson’s second phase of transforming J.C. Penneys into store-within-a-store centers called ‘Town Squares’ is the long-term agenda, but there’s not much here for investors to be giddy about in the present.
Short sellers love JCP, as it has declined by almost 40 percent since the start of 2012. Specifically, the stock’s short interest is 31.9 percent of its float, while shorting activity has increased by 45.5 percent year-to-date. Going forward, even value hunters should stay away from JCP until these figures begin to reverse their bearish direction. To read up on regular reports about short selling activity and other investment indicators, check out WealthLift’s INSIDER blog today.
Fool blogger Jake Mann does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares of Ancestry.com and The Buckle. Motley Fool newsletter services recommend Ancestry.com. 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.