Monday, July 27, 2009

The Best Short-Selling Opportunities Of The Year (C)(GE)(F)(SBUX)(SIRI)

There is still some conversation about the federal government restricting short-selling activity in certain stocks. The counterargument to these restrictions is that short selling plays an important role in the valuation of securities by efficiently allowing investors to bet that a stock will fall as readily as they can bet that it will rise. Short sellers have the reputation, whether deserved or not, for trying to manipulate information about public companies with the hope of driving their prices down. That may be true.

24/7 Wall St. has come up with a list of the best short-selling opportunities between now and the end of the year. The list was chosen based on: 1) trading volume, 2) the total short position in the stock over the first half of the year, 3) a history of the short position in these stocks rising or falling rapidly, and 4) stocks in companies that tend to move on news throughout the year and not just on earnings information.

Barron’s published a list of five companies “to bet against now.” The firms came from recommendations from Short Alert, a research firm. The reasons for each company being a candidate for shorting are compelling, but the firms have small floats and modest market caps, meaning that once the readers of the financial weekly have taken short positions and the story has driven the stock prices of the companies down, the opportunity to make money will be gone. Many of the firms on the 24/7 Wall St. list trade over 10 million shares a day, and several average over 25 billion. Most of the companies on the 24/7 list also have market caps in the tens of billions of dollars and there are corporations on the list that have stock market values over one hundred billion.

1. Citigroup (C) is a nearly perfect proxy for trading the trouble in large financial institutions and its short interest shows that. As of June 15 according to NYSE data, there were 1.244 billion shares sold short in Citigroup, the largest short position in any public company, and it had an average daily trading volume of 220 million shares a day. The bank’s price volatility makes it even more attractive. The stock dropped from over $7 at the beginning of the year to below $1 in March and then rebounded to more than $4 in April. The shares now trade just below $3. The constant rumors about the fate of Citi’s CEO, the banks potential losses, and sales of its assets can cause the stock to take huge swings in a matter of a day.

2. Ford (F), the only publicly traded US car company stock, is the single way for investors to play the domestic automotive sector. The shares have recently run up sharply as Ford has improved its market share, but the short position in the stock is still over 135 million shares and the stock trades almost 95 million shares a day. The short interest in Ford is so active that shares sold short moved up 17% in the latest period. News about consumer confidence, consumer credit, and car sales trends all move the stock which traded at $1.58 in February and has moved above $6 in the last several days.

3. Home Depot (HD) is a way for investors to play both the housing and retail sectors. Short interest in the stock was more than 58 million shares as of June 15 and Home Depot trades an average of 16.6 million shares a day. The stock has been through a series of significant swings this year from more than $25 in January to $18 in March. Home Deport moved up to $26 in May as the market believed housing was at the very early stages of a recovery. The stock moved back to $22 as those hopes slipped away. The constant barrage of data on housing starts and prices and trends in consumer spending will keep Home Depot shares subject to daily swings of 3% or 4%.

4. Las Vegas Sands (LVS) is a way for investors to play the US gambling industry. It is also a way to trade the movement of gambling into Macau. The casino company may spin off its Macau assets in an IPO. Las Vegas Sands has been used as a proxy for part of the junk debt markets. The company has $10 billion of high risk obligations on its balance sheet. Billionaire Sheldon Adelson is CEO of LVS, which gives the company a well-known face. A huge 19% of the shares in Las Vegas Sands are sold short and the total short interest is 60 million shares. The stock is subject to remarkable fluctuations, a short-seller’s dream. It traded early in year at $8.48, dropped to $1.42 in mid-March and recovered to more than $11 in May and now trades just above $7.

5. Gannett (GCI) is the largest newspaper chain in America and shorts use it to make investments in the faltering industry. Gannett traded at almost $9 at the beginning of the year. Bad results from the industry and a sell-off in the market pushed it below $3 at the beginning of the second quarter. Gannett’s price was also hurt when the company cut its dividend. Gannett shares shot to $4 when Ariel Investments doubled its investment in the newspaper company in early April. The stock continued to rally for a month and pushed above $5. Recent news of layoffs and weak earnings has knocked the stock back to $3.30. Seventeen percent of Gannett’s shares are sold short and the total short interest in the stock is 40.4 million shares.

6. Sirius XM (SIRI) continues to be one of the most active shorts, leading all Nasdaq stocks in shares sold short with at total short position of 165 million shares on June 15. Average daily trading volume is 22 million. Sirius is still a penny stock, trading at $.44 up from a 52-week low of a nickel. After nearly going bankrupt early in the year. The satellite radio company recently raised $525 million at an 11.25% interest rate making it a good way to trade the junk debt market. Subscriber growth, the key to the company’s future, has slowed. The price charged to customers recently went up because of an increase in the U.S. Music Royalty Fee. Sirius shares are affected by monthly car sales numbers because new vehicles are Sirius’s largest source of customers.

7. Merck‘s (MRK) shares can be moved by patent expirations, generic competition, FDA announcements of drug side-effects, and its acquisition of Schering-Plough. Its stock is also subject to trading based on news from the Big Pharma and biotech industries and the Administration’s new healthcare plans. Merck is the sixth most shorted stock among all companies listed on the NYSE. There are 164 million shares short in the company and daily trading volume is almost 20 million shares. Merck’s stock has been as high as $31 this year and as low as $20.

8. Nokia (NOK) is the best way to trade the global handset business and to some extent the cellular industry in general. The firm sells 38% of all handsets purchased worldwide. It has relationship with virtually every carrier in the world. The stock dropped from a 52-week high of over $28 to $8.47 as worldwide consumer spending collapsed and cell phone sales contracted for the first time in years. Nokia sells extremely inexpensive handsets in emerging markets and expensive smart phones like its new N97 which retails for almost $700 which makes it a play in emerging and developed cellular markets. Short interest in Nokia is 49.3 million shares up a considerable 31% in the most recent period. The stock trades over 19 million shares a day.

9. JetBlue (JBLU), like the rest of the airline industry has gone from being in awful shape a year ago when oil moved about $140 a barrel to reasonably good shape as oil fell at the beginning of 2009 and then back into trouble as the recessions has decimated demand for airline seats. JetBlue’s shares dropped to close to $3 a year ago and recovered to almost $8 at the beginning of this year. Recently, they have traded below $4 and news from the industry about fuel prices and passenger demand could push the stock even lower. The short interest in JetBlue rose almost 60% in the most recent period and there are now over 31 million shares sold short in the company. Average daily volume is 17 million shares.

10. Microsoft’s (MSFT) stock is the broadest proxy for hardware sales, software sales, and Internet revenue among any shares traded on any exchange in the world. Short interest in Microsoft was almost 71 million shares in the latest measurement period, up a substantial 24%. Trading volume averages 55.8 million shares. A year ago, MSFT shares traded over $28, but a combination of poor earnings, weak sales of its Vista operating system, and layoffs pushed the stock down to $15 in the spring. The stock is currently back above $23. Microsoft’s shares are likely to move up or down very substantially in the next few months. Its new Bing search engine appears to be taking market share from Google (GOOG) and Yahoo! (YHOO) after the world’s largest software company struggled for years to get a foothold in the sector. Any permanent improvement in Bing’s market share would be a breakthrough. The early effects of Bing’s launch could sputter and Microsoft’s efforts would be seen as another expensive failure. The company’s new Window 7 operating system will be widely release in October and the market will be making its bets about whether the product will be a success or a modest failure like its predecessor Vista. Any recovery of global PC sales would also help Microsoft.

11. Starbucks (SBUX) is a cult stock and its market following is not justified by the size of its sales. Shares short in the most recent period were almost 39 million shares, an increase of 18%. The Sisyphean efforts of CEO and founder Howard Schultz to get the company back to its glory days also attracts investors that might otherwise find the company uninteresting. It is hard to imagine that Starbucks traded over $40 in late 2006 and then fell to just above $7 earlier this year. The stock trades over $13 today. The market watches Starbucks pricing, its product decisions, and its competition such as McDonald’s (MCD) extremely closely. The shares are quite volatile.

12. Dell (DELL) has a large short interest because so many traders think it will do badly. So far the company has not disappointed them. Shares sold short in Dell are 52.5 million up 31% in the most recent period. Average daily volume in the stock is more than 26 million. Dell is not only traded on the basis of global PC and servers sales; it is also pushed down by its dwindling market share. The company has gotten increased scrutiny lately because of plans to enter the handheld electronic device business, probably two years too late to make any difference. Dell’s shares have rebounded, based on a belief that PC sales will improve later this year, but its 30% rise makes it a logical target for short sellers.

13. Citigroup may be a good proxy for troubled money center banks Fifth Third (FITB) is an equally solid one for large regional banks that took TARP money. Fitch recently downgraded the firm’s long-term issuer default rating to “A-“ from “A.” The bank operates in the Midwest where business failures tend to be high and real estate values are falling. FITB is the 10th most shorted stock among companies listed on Nasdaq despite its diminutive size. It has 51.3 million shares outstanding and which is 9% of its float. The stock trades 39 million shares a day, an extraordinarily high number for a modest-sized financial firm. Traders looking for wild prices swings will find them trading FITB shares. The stock was over $8 at the start of the year, dropped to $1.01 in February and has recovered to $6.88. It is not unusual for the stock to trade over 100 million shares in a day.

14. Palm (PALM) has gone from being the most reviled company in the smart phone business to becoming the industry’s “comeback kid.” Along the way it has burdened itself with a poor balance sheet and launched its much-anticipated Pre, a competitor, either worthy to stand up against the Apple (AAPL) iPhone or not, depending on your point of view. Palm’s market cap is only $2.2 billion but the short interest in the company’s shares is 38.3 million shares, which is a high 30% of the float. It is no wonder. The stock trades at $15.75, near its 52-week high and up from a 52-week low of $1.14. Palm has done a good job of promoting the Pre’s prospects and American sales though Sprint (S) got off to a good state. Recent comments from Pali Capital are that Pre’s sales have started to fall apart.

15. GE (GE) is the fourth most shorted stock among companies traded on the NYSE. It is no surprise. GE is a one-firm basket of infrastructure, industrial, manufacturing, medical devices, and financial services assets. Investors interested in the market success of “green” initiatives can also look at GE as a way to track environmental improvement products and services. GE’s earnings have been lackluster over the last year. It hit a wall on Wall St. over concerns about the potential of huge losses at its financial services operations. GE has said that this is not a significant or disastrous problem, but the firm’s stock price indicates that investors have not become comfortable with that. There were 151.3 million shares sold short in GE as of the last measurement date. GE trades 68 million shares on an average day and has one of the highest market caps of any company in the world at $121 billion. GE traded above $42 in late 2007 and dropped to $5.87 earlier this year due to panic about its financial services operations. A drop in stock price of a mega-cap company which was both that large and that fast is unprecedented. The shares have not recovered much and trade at $11.46.

Douglas A. McIntyre

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