Every two weeks, data is released on the level of short interest
in specific stocks. You can find this data in places like the Wall
Street Journal, for example. It can clue you into possible problems
ahead, but it can also spell opportunity. If the short-sellers are
wrong, you can make some serious money, as those bearish investors
will need to buy back their borrowedshares .
In recent months, technology investors have been focusing on a pair
of companies they feel are ripe for a fall. Let's look at what they
believe and try to assess if they're on the mark.
Advanced Micro Devices (
This chip maker is in a real tug-of-war. Some analysts believe
are quite undervalued, as the company may be poised to deliver
stronger-than-expected results in coming quarters. Still others see
AMD in decline, noting that it may finally soon succumb to a
long-standing battle with industry titan
Intel (Nasdaq: INTC)
AMD's bulls think the company's new chip offerings -- one that
combines graphics capabilities on a core processor and another that
is optimized to help servers run in a faster mode -- could help
rebuild lostmarket share . [I ran through the
case for AMD
in this article.]
Since then, a few more analysts have started to sing the company's
praises. For example, analysts at Sterne Agee raised their rating
from "Hold" to "Buy" in early February with a $15 price target
(nearly double current levels), predicting that AMD will steadily
from Intel this year after ceding ground the past few years.
Analysts at Citigroup recently noted that signs are pointing to a
strong second half for PC and server spending, predicting AMD will
deliver quarterly results ahead of forecasts.
Short-sellers see a completely different picture. They question
whether AMD will really take market share simply based on a
strategy of technological parity with Intel along with lower
selling prices. They figure Intel can simply cut prices on its
chips if it starts to see any market share erosion. And in a price
war, mighty Intel always wins. The shorts also presume the abrupt
departure of Dirk Meyer, AMD's CEO, in early January -- right as
the company was on the cusp of releasing major new products -- was
a sign that undisclosed problems lurked beneath the surface.
Lastly, they think tablet computers such as
Apple's (Nasdaq: AAPL)
iPad will sharply erode demand for traditional laptop and desktop
In this battle, I believe the bulls have a stronger case. AMD
continues to secure many new customers for the two new chip designs
and results in the second half are indeed likely to start reversing
the recent trend of flat or negative sales growth. Much of that
view resides on a steadily improving U.S.economy . Employment
trends are looking better, which is often a pre-cursor to an
upgrade cycle for PCs among corporate customers. There's no reason
why Intel and AMD can't both flourish if the backdrop is broadly
I also discount concerns about the Meyer's departure. If something
deeper was amiss, we would have heard about it by now. Indeed, the
company's subsequent conference call, which was held three weeks
after Meyer left, gave the impression of a very stable ship. The
announcement of a new CEO could be one the reasons that
short-sellers may look to cover their positions. Lastly, concerns
that tablet computers will cannibalize PC sales may be overdone.
These devices are great as secondary access devices, but few
corporate staffers are going to sit at their desk typing into
tablets all day.
My relatively bullish view for AMD, if it comes to pass, means
short-sellers will morph into furious buyers to close out
positions. They held 64 million shares short at the end of
February, which stands as the eighth-largest short position of any
company's stock. The only caveat to this short-squeeze scenario: It
remains unclear how the crisis in Japan will affect the PC
industry; you may want to wait a few weeks to let that situation
clarify before jumping in.
Sprint Nextel (
Short-sellers are really taking their shots at this wireless phone
service company, holding more than 100 million shares short. Sprint
has some hard choices to make as it figures out how to better
compete with industry giants
To bulk up, Sprint may enter into talks with T-Mobile, the
industry's fourth-largest player, according to the rumor mill.
Trouble is, the two firms use different wireless technologies and
would have a major integration effort to complete. Sprint already
did that when it acquired Nextel in 2004. That deal made Sprint
larger, but the combined company got bogged down with transitional
problems and many customers defected. Short-sellers predict a deal
between Sprint and T-Mobile will bring the same problems and also
create a lot of new debt on thebalance sheet . It's also worth
noting that Sprint's heavy investments in
Clearwire (Nasdaq: CLWR)
, a leading provider of high-speed wireless service, now looks like
a big money loser.
Most telecom industry analysts think the deal would make sense for
Sprint, figuring that technology platform integration issues are
not as onerous as they were with Nextel. They've been talking up
the stock recently, and it is up to $5 again. Yet the short-sellers
still may hold the upper hand. T-Mobile's backers, Deutsche
Telecom, have expressed a very stiff -- and seemingly unrealistic
-- asking price for T-Mobile. Investors may be unpleasantly
surprised by an agreed-upon price that makes it hard for Sprint to
ever get out from under its massive
. Without a deal, Sprint also looks to be challenged, as it shifts
focus to a more economically-challenged customer base that pre-pays
for cell phone usage.
Action to Take -->
So what can we learn from this exercise? Well, if you're looking
for a long idea, AMD appears the safer bet.
Despite myriad challenges, AMD looks increasingly well-equipped to
fight back against mighty Intel. Incremental market-share gains in
coming months could create a positive cycle as more potential
customers hear that it's "safe" to go with AMD. Even if Intel
fights back on price, positive reviews from a performance
perspective should help AMD's chips to make further inroads.
Sprint, on the other hand, looks messier. The company may be on the
cusp of a "Hail Mary" pass to try to close the gap with bigger
rivals. But many Hail Mary passes land with a thud -- or are
intercepted. Short-sellers appear closer to the mark with this
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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