A Short Seller's Perspective: Stock Market Corrections Are Natural

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(List compiled by Andrew Dominguez. Data sourced from Finviz and Yahoo! Finance.)

Cowering in fear of a stock market meltdown? That’s understandable. Investors around the world, including this author, have had a perplexing August.

Karim Rahemtulla of White Cap Research Group is sympathetic. Fear of the unknown is quite normal, after all. 

“Massive sell-offs like we are seeing are enough to make anyone jumpy. But it's normal to be scared every once in a while. In fact, from both a market and investor perspective, it's actually healthy and something to look forward to,” he writes.

Rahemtulla encourages his readers to look on the bright side: stocks are really cheap right now, the cheapest they’ve been since 2009 (by price-to-earnings ratios). And there may be many upsides to buying stocks now. 

For starters, dividend yields of S&P 500 companies are higher than benchmark 10-year Treasury yields. The Fed also announced that it is keeping interest rates near zero for quite a while, which should provide stimulus for the economy.

IPO markets are also healthier than they have been in years, Rahemtulla adds. He is also optimistic about the conclusion of the US debt deal, positive (if meager) GDP growth, and strong US corporate earnings.

Of course, these conditions are transitory. “Corrections are part of the game - and their frequency is increasing. The key to dealing with them is to be ready,” Rahemtulla writes.

For protection, he recommends using trailing stops and buying LEAP options, put options, and other hedges against downsides.

“In doing so, you'll not only protect yourself, but by buying solid companies that are ‘on sale,’ you'll position yourself nicely for the market's upswings,” he explains.

So, which stocks are attractive buys? Well, these S&P 500 stocks have seen significant short covering, which might indicate that short sellers think they have had a big enough correction. Is this your signal to invest?

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List sorted by change in short interest as a percentage of the share float.

1. Ventas, Inc. (VTR): Healthcare Facilities REIT industry with a market cap of $7.47B. Shares shorted have decreased from 16.06M shares to 10.62M shares month-over-month, a change representing 3.36% of the 161.99M share float.

2. Janus Capital Group, Inc. (JNS): Asset Management industry with a market cap of $1.34B. Shares shorted have decreased from 10.31M shares to 5.14M shares month-over-month, a change representing 2.87% of the 180.04M share float.

3. Allegheny Technologies Inc. (ATI): Metal Fabrication industry with a market cap of $4.93B. Shares shorted have decreased from 10.25M shares to 7.94M shares month-over-month, a change representing 2.33% of the 99.04M share float.

4. AK Steel Holding Corporation (AKS): Steel & Iron industry with a market cap of $931.7M. Shares shorted have decreased from 18.10M shares to 15.82M shares month-over-month, a change representing 2.10% of the 108.76M share float.

5. Best Buy Co. Inc. (BBY): Electronics Stores industry with a market cap of $9.39B. Shares shorted have decreased from 41.95M shares to 36.51M shares month-over-month, a change representing 1.81% of the 301.33M share float.

6. Gap Inc. (GPS): Apparel Stores industry with a market cap of $8.98B. Shares shorted have decreased from 31.93M shares to 25.68M shares month-over-month, a change representing 1.43% of the 436.87M share float.

7. AutoNation Inc. (AN): Auto Dealerships industry with a market cap of $4.99B. Shares shorted have decreased from 12.76M shares to 12.10M shares month-over-month, a change representing 1.36% of the 48.58M share float.

8. Nicor Inc. (GAS): Gas Utilities industry with a market cap of $2.34B. Shares shorted have decreased from 2.36M shares to 1.76M shares month-over-month, a change representing 1.34% of the 44.82M share float.

9. Forest Laboratories Inc. (FRX): Drug Manufacturers industry with a market cap of $9.95B. Shares shorted have decreased from 22.41M shares to 19.04M shares month-over-month, a change representing 1.34% of the 251.85M share float.

10. First Solar, Inc. (FSLR): Specialized Semiconductor industry with a market cap of $8.59B. Shares shorted have decreased from 20.85M shares to 20.08M shares month-over-month, a change representing 1.31% of the 58.82M share float.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks


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