After a couple of weeks of steady losses, the stock market is
now in all-out frenzy mode. Massive drops or eye-popping gains are
the norm these days, creating havoc for anyone trying to establish
a foothold with long or short-oriented investments. In fact, short
sellers are the most exposed in this current era of high
volatility, even with their potential of reaping huge gains, as
they have recently.
Short sellers need to watch out for sudden rallies. If they are
targeting a heavily-shorted stock, then a
could push up the stock up faster than the broader market, creating
potentially huge losses for shorts -- yet equally large gains for
investors who went long.
With this in mind, I've been looking at the just-released
short-interest data, which tallies the short-interest levels in
stocks as of July 28. The size of these short positions may have
changed since then, but almost all of the most heavily-shorted
stocks are likely to remain near or atop the leader board when we
get the next round of data that tracks short levels through Aug.
Make no mistake, some heavily-shorted stocks are clearly in deep
trouble, and any sort of market rally is unlikely to rescue them.
Sprint Nextel (NYSE:
Eastman Kodak (NYSE:
are all in the sights of short-sellers and all appear to have very
. But not all heavily-shorted stocks look set for a sharp pullback.
Here are four shorted stocks that could post a powerful rally when
the market's downturn comes to an end.
1. Ford Motor (NYSE:
Shares held short: 148 million
This was the most heavily-shorted stock on the market, according to
recent data. Since July 28,
have fallen from $12.32 to near $11. In effect, anyone that has
invested in this
story back in January 2010, initially saw their investment nearly
double during the following year, but now have seen all of those
gains wiped out.
The difference between then and now is quite stark. In January
2010, Ford had just wrapped up a year with sales falling 19% to
$116 billion and
per share of just $0.86. This year, Ford is on track for $125
billion to $130 billion in sales and, much more importantly,
earnings per share of about $2. The stock traded for 11 times
trailing earnings in January 2010 but now trades for just five
times projected 2011 profits. And this is in a lousyeconomy .
Imagine what Ford could do when the current economic pall lifts.
It's no fun owning a stock like this in a market rout, but the
long-term outlook is just
too appealing to ignore
. (Note: I like to swing from a look at valuations relative to
trailing earnings before June 30, to a look at projected earnings
once the year reaches the half-way point -- hence the
2. AMD (NYSE:
Shares held short: 102 million
In a similar vein, shares of this chip maker have been pummeled in
the market dive. When
I profiled AMD
in late July, I noted the company's new line of microprocessors
were starting to gain traction, setting up a possibly painful
short-covering by short-sellers. Since then, the stock market has
done the handiwork of short-sellers, pushing the stock down roughly
20%. But short-sellers could still face real pain. In the next
month or two, semiconductor analysts are likely to provide an
updated view on the potential traction AMD is starting to make with
PC and server makers. Expectations remain very low, judging by the
stock price, which is the perfect backdrop for a short squeeze.
3. EMC (NYSE:
Shares held short: 78 million
It's curious to see this tech titan still near the top of the list
of heavily-shorted stocks. In May, when shares traded at $28, I
thought they were vulnerable to growth expectations that might
I noted then
, the stock was trading at more than 20 times trailing earnings,
which was "simply too rich for such a sober current environment for
tech spending." However, the subsequent selloff down to $21 no
longer brings this same overvaluation concern. Shares now trade for
just 14 times projected 2011 profits. It's worth noting investments
in storage and "cloud computing" remain a priority for information
) planners, even as other areas of IT will be throttled back. EMC
has been -- and will remain -- at the forefront of this trend.
4. SuperValu (NYSE:
Shares held short: 43 million
This one is truly a head-scratcher. Short-sellers have been
targeting this grocer for nearly two years because they expect
to cause its demise. But for much of this time, Supervalu has been
delivering better-than-expected quarterly
. In addition, as I noted on Tuesday, Aug. 2, Supervalu is on track
to generate roughly $2 billion in
free cash flow
between now and 2015, much of which should be applied to the
With less debt on its books, what's left for short-sellers to focus
on? Well, the grocer is clearly underperforming in terms of sales,
losing business on the low end to
and on the high end to
Whole Foods (NYSE:
. Still, even with a dismal sales picture, the company is able to
throw off ample cash flow. Supervalu's shares went from $8 to $11
this spring when investors realized the robust nature of the
stock's cash flow. But the recent market rout has forced shares all
the way back down to around $7. In a stable market, this stock
still has the potential to make trouble for short-sellers.
Action to Take -->
Keep an eye on the market's most heavily-shorted names. Any
mini-rallies in this environment could take their shares sharply
higher. If you're thinking about short-selling these stocks, think
again. But if you're looking for deep value opportunities, these
are great holdings because these four names have great potential
for a rebound.
-- David Sterman
The One Stock to Buy BEFORE President Obama's Emergency Briefing
A little-known event is about to take place that could be
catastrophic to the United States. You're not hearing about it on
CNN or Fox News (yet)... but you will. Don't be surprised if
there's a briefing from the president himself. The governments of
China, India and Russia are all involved... and an estimated 31
million Americans will be impacted. StreetAuthority's top research
analyst has put together his own "emergency briefing" that spells
out step-by-step what's going on. He's also identified the one
stock he predicts could double in a hurry as this situation
unravels. Click here to watch the briefing.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.