Blame Short Sellers, or the Over-Leveraged Banks?

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(Written by Alexander Crawford. Short data sourced from Yahoo! Finance, all other data sourced from Finviz.)

According to Jean-Pierre Chevallier’s blog Business économiste monétariste béhavioriste, several French banks are extremely leveraged relative to their true equity at fair value, which may be the cause of their recent roller-coaster dips in stock price.

Chevallier reports that BNP Paribas is currently leveraged over 27 times relative to equity. According to data released by Société Générale, SocGen is leveraged 28:1 based on international accounting standards (and 23:1 based on US conventions). From Société Générale:

As stated in the Group financial reporting (Q2.11 supplementary data page 57 ), Societe Generale Net Asset Value stands out at of EUR 40.6 billion as of 30 June 2011. The Group Leverage Ratio would then stand around 28x (without taking into account the US GAAP netting conventions that would further reduce the leverage to around 23x).

Needless to say, these do not represent normal (or prudent) capital structures for such large institutions.

This news sheds a different light on the recent share price collapse and subsequent short-selling ban on shares of 11 French banks (including both BNP Paribas and Société Générale).

When share prices collapse, officials are always quick to blame short sellers as the evil cause. It is important to point out that short selling is a legitimate way to hedge risk - long positions are coupled with short positions, and when short positions are closed, long positions must also close. Some argue that closing one side of this trade only increases volatility.

But now there’s more explanation as to why these banks have been experiencing such strong volatility in stock price – highly leveraged companies often do.

For a look into US-traded financial stocks that are also seeing increased short-selling activity, we compiled the following list.

Do you think these financials could be over-leveraged? Or are these short-squeeze opportunities? Use this list as a starting-off point for your own analysis.

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List sorted by increase in shares shorted as a percent of share float.

1. Greenhill & Co., Inc. (GHL): Investment Brokerage Industry. Market cap of $1.12B. Shares shorted have increased from 5.17M to 5.89M month-over-month, a change representing 2.66% of the company's 27.03M share float. The stock is a short squeeze candidate, with a short float at 22.09% (equivalent to 10.27 days of average volume). The stock has performed poorly over the last month, losing 17.2%.

2. Financial Engines, Inc. (FNGN): Diversified Investments Industry. Market cap of $926.03M. Shares shorted have increased from 4.01M to 4.81M month-over-month, a change representing 2.27% of the company's 35.28M share float. The stock is a short squeeze candidate, with a short float at 10.99% (equivalent to 9.74 days of average volume). The stock has had a couple of great days, gaining 14.52% over the last week. The stock has performed poorly over the last month, losing 13.46%.

3. BancorpSouth, Inc. (BXS): Regional Banks Industry. Market cap of $924.23M. Shares shorted have increased from 9.30M to 10.66M month-over-month, a change representing 1.88% of the company's 72.18M share float. The stock is a short squeeze candidate, with a short float at 14.72% (equivalent to 8.88 days of average volume). The stock has lost 11.51% over the last year.

4. Cypress Sharpridge Investments, Inc. (CYS): REIT Industry. Market cap of $1.13B. Shares shorted have increased from 7.15M to 8.30M month-over-month, a change representing 1.41% of the company's 81.52M share float. The stock has had a couple of great days, gaining 14.46% over the last week.

5. Pacific Capital Bancorp (PCBC): Regional Banks Industry. Market cap of $847.18M. Shares shorted have increased from 623.44K to 656.62K month-over-month, a change representing 0.81% of the company's 4.10M share float. The stock is a short squeeze candidate, with a short float at 16.02% (equivalent to 9.74 days of average volume). The stock has performed poorly over the last month, losing 16.42%.

6. Astoria Financial Corporation (AF): Savings & Loans Industry. Market cap of $1.0B. Shares shorted have increased from 8.14M to 8.66M month-over-month, a change representing 0.68% of the company's 76.84M share float. The stock is a short squeeze candidate, with a short float at 10.44% (equivalent to 7.17 days of average volume). The stock has performed poorly over the last month, losing 21.02%.



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

Referenced Stocks: AF , BXS , CYS , FNGN , GHL , PCBC

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