Short sellers must always stay on their toes. Any time the
market is in rally mode -- as it has been the last few months --
they need to unwind their short bets, lest the rising market
inflict untold pain. They tend to typically pile back into these
closed short positions once they think a rally has begun to end. So
it pays to take a fresh look at some of the most heavily-shorted
stocks, if you believe that the recent rally has grown tired.
in these names could quickly push them back down.
Looking at the most recently available data, I found three
heavily-shorted stocks that could be ripe for a fall.
Simply looking at the recent quarterly results from this mobile
telecom service provider, you'd probably think its shares are
fairly valued with perhaps a bit of upside. But short sellers see
an albatross around this company's neck that threatens to damage
or sharply inflate its share count. And either of those events
could push the stock, form a current $4, closer to the $3 mark.
Sprint has been heavily investing in an ultra-fast wireless
technology through its 54% ownership of
Clearwire (Nasdaq: CLWR)
. Even as Sprint has poured several billion dollars into Clearwire
over the years, that might not be enough, as Clearwire just
announced that money is quickly running out. That's a risk
in my negative profile of Clearwire back in August.
It may be hard to find any new investors as Clearwire seeks fresh
capital (perhaps up to $3 billion). So to keep it afloat, Sprint
may be on the hook to write another large check to partially aid in
the capital rescue efforts. Sprint has ample cash, but also has its
own debts to think about. The carrier will need to pay off a $1.6
billionbond in January, and has an additional $18 billion in
to worry about as well.
Short sellers are betting that Sprint will look to issue fresh
equity or take on more debt to raise cash for Clearwire, and the
potential dilution or increased balance sheet risk would likely put
a hurt on Sprint's shares. However, this is a finite short play.
Keep an eye on how Clearwire resolves its financing mess. If it can
do so -- with or without Sprint's help -- and Sprint's shares hold
their own, then it's likely time to cover the short position.
The St. Joe Company (
This stock was a long-time favorite of value players, as its
massive stake of undeveloped realestate in Northwest Florida was a
potential gold mine. Many assumed that developers would pay top
dollar to create a new Martha's Vineyard in a region known as the
Well, St. Joe sat and sat on much of that land, until the Florida
housing bubble burst. Now, short sellers think the company's land
holdings need to be written down to reflect their current value,
and they suspect it will be a very long time before St. Joe will be
able to realize any high value for its land. In the mean time, the
company is slowly selling off land just to cover operating expenses
and may not have nearly as attractive a realestate portfolio down
the road if the Floridaeconomy takes a long time to recover.
Yet it's the expectation of the need for write-downs that is the
real near-term threat. Short sellers have been piling on to this
notion, ever since it was proffered by fund manager David Einhorn
at last month's Value Investing Congress. If St. Joe does feel
compelled to write down the value of its assets (with some
forecasters predicting a -25% haircut), then shares would surely
take a hit. So this is a pretty clear short play.
Keep an eye on management's decision. If and when it decides to
write down assets, you'd probably want to close out positions. If
management doesn't do so by the end of the first quarter, it
probably never will. Then again, there's not a lot of risk sitting
on this short position, as few positive catalysts exist in the next
Longer term, I tend to disagree with Mr. Einhorn. Florida is on its
heels right now, but as I brace for another tough New York state
winter, I dream of an eventual stake in Florida, as thousands of
other northerners likely do. Down the road, Florida will once again
become the realestate development capital of the country, and once
the state starts to get back on its feet, St. Joe may be a solid
play for longs.
Barnes & Noble (
The bearish bets just keep on rising at the nation's largest
bookseller. Shorts boosted their stake in Barnes & Noble
roughly +5% in the last two weeks of October to 11.1 million
shares, and it would take the equivalent of 29 trading sessions to
unwind the bearish positions, the sixth-largest "days to cover"
ratio of all publicly-traded companies. [I laid out the
case against Barnes & Noble back in August.
You can read that article here
Since then, it has become increasingly clear that e-books are
starting to take away
from traditional paper-based books. And the e-books biz
increasingly looks to be dominated by
Amazon.com (Nasdaq: AMZN)
Apple (Nasdaq: AAPL)
, not Barnes & Noble.
Since my last look at Barnes & Noble in August, analysts have
subsequently altered their fiscal (April) 2012 outlook from a small
profit to a small loss. And since then, no other suitors have
emerged for the company, even as it is considered to be "in play."
Netflix (Nasdaq: NFLX)
Blockbuster (OTC: BLOAQ.PK)
on the ropes, and rivals look similarly ready to make life just as
bad for Barnes & Noble. That's why shares look so ripe to short
Action to Take -->
These three companies are in short sellers' cross hairs, yet each
has a specific investment thesis in place. Investors need to stick
to that thesis if they choose to short these stocks. If Sprint is
able to ride out the Clearwire mess, if St. Joe's indeed writes
down its realestate without taking a big hit, and if Barnes &
Noble somehow funds a buyer, you'd do well to cover your short
positions straight away.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.