Buyers Beware: 4 High-Flying 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.
Short selling activity is a good indicator of the bearish sentiment surrounding a stock, and as discussed in this article, even giants like Apple are not immune to short sellers’ ire. In almost all instances, an increased amount of shorting activity means that the Street’s biggest money managers (here’s our Top 10), have grown less fond of that particular stock. Interestingly, overselling can have a positive effect on a stock’s price, as short sellers may be forced to cover their positions – a situation known as a “short squeeze.” Below are four stocks that have returned an average of 20.4% year-to-date, but have seen a curious increase in shorting activity in recent months.
American Capital Agency (NASDAQ: AGNC)
Earlier this summer, we went into detail here about the prospects of American Capital Agency, which looks like the best mortgage REIT for your buck. Generally speaking, we like AGNC because: (1) a small percentage of its loans are nearing maturity, meaning it holds more higher-yield pre-recession mortgages; (2) it has been growing its funds from operations more than 50 times faster than competitors like Annaly Capital and Anworth Mortgage; and (3) its shares are undervalued when using the P/FFO ratio.
Despite these bullish signs, AGNC still faces the same risks that all other mREITs do – primarily from federal stimulus programs like HARP and interest rate fluctuations. Over the past month, shorting activity surrounding the stock has increased by 49.4% to hit a one-year high of 12.4 million shares. Moreover, AGNC’s days to cover ratio has doubled over this time, indicating that short sellers may have a tougher time liquidating their positions to capitalize on an upswing in price; this is generally a bearish signal.
Since the start of the year, Citigroup has returned a modest 9.8%, being outpaced by competitors like JP Morgan (11.3%) and Bank of America (37.9%). Since this kind of news broke, the shroud of the LIBOR scandal has fallen over the entire financial sector, undoubtedly eating away investors’ fragile confidence. In fact, both Citigroup and Bank of America have seen the bears surround their stocks quite heavily, as short selling activity has jumped by more than 50% since mid-May. Even more interesting is the fact that C and BAC beat the Street’s most recent earnings expectations by 6.7% and 26.7% respectively. Both also trade at price-to-earnings and price-to-book ratios that are below the industry averages; if each can make it through the LIBOR fallout unscathed, they may be good value plays.
Microsoft (NASDAQ: MSFT)
Since the announcement of its Surface tablet in mid-June, the hype surrounding Microsoft has definitely ticked up, though its shares are actually down by nearly 2% in this time. Even more intriguing is that year-to-date short selling activity is up by more than 36% to 92.7 million shares, as the stock’s days to cover ratio has currently spiked to a one-year high of 2.6. From a valuation standpoint, MSFT actually trades at a P/E ratio (15.1X) above its 5-year (13.8X) historical average and primary peer Apple (14.6X). In fact, over the past half-decade, Microsoft’s earnings have traditionally been valued at a 9% discount to those of the S&P 500. This year, they are trading at a 1% premium.
While short selling activity should not be an end-all-be-all indicator of whether you should dump shares of a particular stock, it is a good metric to monitor. For more trading ideas in today’s uncertain market environment, visit WealthLift INSIDER.
WealthLift has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , and Microsoft. 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.