Short sellers are wrapping up another tough year, as a
liquidity-fueled rally has helped to levitate even the most
dubious business models.
Some short sellers have even thrown in the towel, noting that
John Maynard Keynes' maxim that "the market can stay irrational
longer than you can stay solvent."
But signs are emerging that this losing approach to the market
may finally be gaining traction.
In recent weeks, a range of heavily-shorted stocks have indeed
begun to move lower, which may be a sign that short selling will
again be a useful component of your broader portfolio strategy in
If you are looking at potential short sale candidates, here
are four that are in the targets of short sellers right now.
|1. Bank of America (NYSE:
Shares of this banking giant have rebounded more than
200% over the past two years. Joining its major banking
peers, Bank of America finally trades back up above book
value, taking away one of the lone pillars of value. That
argues for muted upside in the year ahead.
Yet it's the downside risk that is coming into focus
as well. In light of the recent wave of multibillion
dollar fines levied on rival
JP Morgan Chase (NYSE:
, short sellers think Bank of America is now quite
vulnerable. It is now the most heavily-shorted stock on
the New York Stock Exchange. The short interest surged
14% in in the second half of November to 134 million
As CNBC recently noted
, expectations are building that tens of billions of
dollars in fines will soon be levied upon other banks,
and no bank is more vulnerable than Bank of America, as
it was at the center of many of the fraudulent mortgage
practices five years ago.
|2. GM (NYSE:
Short sellers boosted their positions in the automaker by
a whopping 24% in the final two weeks of November to 107
million shares. It's not simply because shares have
doubled over the past two years.
Instead, it's a growing concern that the coming year
will be a tougher one for the industry.
Dealer inventories are becoming
, thanks in part to aggressive manufacturing
schedules. Higher inventories threaten to bring back
is gearing up to launch an all new F-150 pickup truck
that will make extensive use of lightweight aluminum.
Ford's lighter trucks are expected to deliver
industry-leading fuel economy, which could lead GM to
boost discounts on its recently-launched line of trucks.
Ford recently trimmed profit expectations for 2014, and
GM's new CEO Mary Barra may be similarly
inclined to establish a lower bar for the year ahead.
Make no mistake, GM and Ford are now truly strong
companies. These stocks will never again trade down as
distressed assets. Short sellers are unlikely to reap big
gains, but instead think that this turnaround play is due
|3. Johnson Controls (NYSE:
One of the most appealing sectors for investors in 2013
has been the industrials. These firms began the year with
modest forward multiples and clear leverage to an
improving economy. As the year ends, bargains are
fast-vanishing. For example,
I noted a year ago
thata broad restructuring could sharply boost profits for
Johnson Controls. Indeed, analysts now expect earnings
per share (
) to surge from $2.66 a share in fiscal (September) 2013
to nearly $4 a share by fiscal 2015.
Trouble is, since my late 2012 profile, shares have
doubled, and now trade for more than 12 times projected
2015 profits. That may not seem like a high multiple,
until you realize that there are really no signs of a
cyclical upturn for Johnson Controls. Sales are expected
to grow less than 5% in each of the next two fiscal
Short sellers think this stock is quite ripe for a
pullback after the solid gains of 2013. The short
interest rose a hefty 177% (to 21.5 million shares) in
the two weeks ended Nov. 29. Such a big short-term
spike is unusual, as short sellers usually tend to slowly
build their positions over time. The shorts may be
focusing on the growing divergence in fiscal 2015 profit
forecasts. A few analysts see EPS approaching $4.25 by
then. Goldman Sachs is near the low end with a $3.65 per
share forecast. Short sellers may be anticipating lowered
forward guidance when results are released in
|4. Twitter (Nasdaq:
As I've noted on a few occasions
, this stock began trading on an overvalued basis, and
after a recent surge, has become completely disconnected
from any sort of fundamental analysis, no matter how far
you look out into the future.
Will the euphoria wear off in coming months? Short
sellers think so. The short interest spiked 181% in late
November, to 17.8 million shares, representing 7% of the
float. If the market slumps in 2014, then investors will
no longer support "story stocks" and Twitter could fall
Risks to Consider:
As an upside risk, a strong start for the markets in 2014
could trigger a short squeeze in these stocks, sending them yet
Action to Take -->
When the markets are rising, it pays to bet against short sellers
by going long on the stocks they are targeting. In recent years,
that approach has reaped big gains as massive short squeezes
ensued. But even if the market simply stops rising, then it pays
to pivot and ride the herd alongside short sellers. They are a
great harbinger of the market's most vulnerable stocks.
The short interest data cited in this article were released on
Dec. 10, for the period ended Nov. 29. The December mid-month
short figures will be released soon after the Christmas holidays,
and you should follow up with these four stocks to see if short
sellers are building even bigger positions.
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