Short Sellers Are Betting Against GE, Exxon And Apple. What Should You Do?

By (dsterman),

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Investors who seek tohedge their portfolios by taking short positions in certainstocks have felt a huge amount of pain in recentquarters . As the S&P 500 is on track to post its eighth straight monthlygain , the vast majority of stocks have been pushed higher, which has fueled unnerving losses for short sellers.

Faced with the prospect of yet more losses, some short sellers are simply throwing in the towel by covering their positions and moving tocash . Data released May 9 showed that in just the last two weeks of April, the short positions in Microsoft (Nasdaq: MSFT) , Micron Technology (Nasdaq: MU) , Groupon (Nasdaq: GRPN) , Comcast (Nasdaq: CMCSA) and Nokia ( NOK ) fell by more than 15%. That's a huge amount ofshort covering in such a short amount of time.

Yet there remains a group of short sellers who refuse to budge. Even after suffering considerable pain, they are keeping their short positions in place -- or even building on them. Here's a look at several stocks andfunds that are seeing notable increases in short positions.

General Electric ( GE )
In the last two weeks of April, the short position in this Dow component rose 14% to 94 millionshares . That's up from just 53 million shares held short at the end of 2012.

The move comes asanalysts slightly trim their growth forecasts for GE in the face of a troubled globaleconomy . GE'ssales are now expected to grow less than 2% in both 2013 and 2014, according to consensus forecasts, though per-share profits are expected to grow in the high single digits in each of those years.

Short sellers likely think itwill prove too difficult for GE's profits to grow so much faster than sales. In fact, GE may start to feel some seriousprofit pressures as the dollar's renewed strength could reduce foreign-earned profits.

ExxonMobil ( XOM )
After staying in the range of 30 million to 40 million shares for much of the pastyear , the short position in this energy giant suddenly spiked 18% in the last two weeks of April, to 48 million. That increase came just a few days after the company reported first-quarter results that showed a few cracks in the armor.

As is the case with many global oil drillers, ExxonMobil's costs are rising quickly because the company must dig deeper to find productive pockets of oil and gas. The higher spending may explain why the company has begun to trim its hefty share buyback programs, from an expected $5 billion the first quarter to $4 billion in the current quarter.

Analysts at UBS take a dim view of thestock , citing Exxon's "production profile continuing to fall short of expectations, underlyingearnings seemingly increasingly reliant onasset sales, and our belief that it will have to further reduce the pace of share repurchases." These analysts alsonote steadily falling per-share profits, from $8.29 in 2012 to less than $8 a share by next year.

Short sellers may also be targeting energy plays like ExxonMobil on concerns that oil prices are set to drop, as I recently noted.

That view may also explain the sudden large increase in an energy-relatedexchange-traded fund (ETF) . TheSPDR Select Fund-Energy ( XLE ) saw a 36% jump in the short interest during the last two weeks of April to 46.6 million shares.

Apple (Nasdaq: AAPL)

A few weeks ago, I noted that this tech giant announced a huge stock buyback plan.

The buyback sure did the trick. Shares of Apple rose more than 10% in late April and still stand above $450.

Yet a slew of short sellers must think the buyback announcement is a cover-up for a suddenly weakeningbusiness model . They've hiked the short interest from 20 million shares in mid-April to 41.6 million shares by month's end -- a 107% increase in just two weeks.

Toput that in context, Apple's short interest had never exceeded 22 million shares in any prior reporting period. Even as Apple was steadily falling from $700 to $400 over the past three quarters, short sellers never chose to make Apple a big target. Yet now, with shares alot closer to the52-week low than the52-week high , short sellers are actually more emboldened than before.

Short sellers may be focusing on sales and profit growth for the current quarter, which are again likely to be subpar before the company embarks on a major revamp of its product lines later this year. The risk for short sellers is that Apple makes a bold new product announcement that freshly invigorates the stock, perhaps aided by a short squeeze . That makes this a risky stock to short, but you need to track the continuingbearish view on Apple, even if you arebullish .

Vulnerable Banks?
Lastly, I want to revisit a bearish view on leading bank stocks. Back in January, I noted that the short interest in the Financial Select Sector SPDR ( XLF ) had surged from 94 million shares at the end of November 2011 to 110 million shares a month later. That figure just spiked higher again in late April, and now stands at 127 million shares. ThisETF has risen 70% since the autumn of 2011, in part due to expectations that a rebounding housing sector would lead to higher levels ofmortgage underwriting .

On the flip side, theinvestment banking aspects of these banks' business models are faced with stiff headwinds, from greater regulation to a reduction in lucrative proprietary trading operations. Short sellers are betting that investors are unaware of the profit pressures playing out in the banking industry and expect a reversal in this ETF.

Risks to Consider: As long as themarket is moving yet higher,short selling can be quite painful.

Action to Take --> Though short selling has been unprofitable in recent quarters, the market's steady advance is showing signs of fatigue; if the market cools off, look for more vigorous trading action among short sellers. That's why you need to track what these short sellers are doing right now, as they may be providing early warning signs of trouble ahead.

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

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This article appears in: Investing , Investing Ideas , Stocks
Referenced Stocks: GE , NOK , XLE , XLF , XOM

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