Every two weeks, investors have a chance to parse the level of
short interest among all stocks on the major exchanges. It's
helpful to glance at these lists, which can be found on
The Wall Street Journal's
website, Nasdaq.com and elsewhere to see which companies are
increasingly in the targets of short sellers. Depending on what you
find, you may decide you want to jump on a heavily-shorted stock --
and ride it back up -- or sell a stock you already own that's just
facing too many headwinds (even better: you could use this list to
be informed enough in advance to avoid a stock).
While perusing this list, I noticed a household name is quickly
moving up the leader board of short sellers:
General Electic (NYSE:
. Short sellers have boosted their negative bet on GE from 64.6
millionshares at the end of July to 102.6 million in the middle of
August. This is a 59% jump in just two weeks, and comes after the
stock market suffered through a brutal three week stretch. Clearly,
short sellers think GE hasn't even begun to feel the brunt of a
tougher economic climate.
To better understand why so many investors are starting to bet
against GE, I read through a dozen analyst reports from various
Wall Street firms. Strangely, they appear uniformly
, seemingly asleep at the wheel in acknowledging what the short
sellers may be thinking about. To see what the shorts are seeing, I
reached out to old colleagues that focus on short-selling to see
what they are thinking and hearing about this
. Here are four reasons they were able to put together...
1. It's theeconomy stupid
To be sure, with $150 billion in trailing 12-month sales, and
tentacles in a wide range of industries and regions, GE is a
for a multitude of economic trends. So some short-sellers simply
see GE as a way to bet against the market and the
in general. Yet that argument isn't quite sufficient because the
short interest in GE is rising much faster than any other stock in
the S&P 500.
2. Nuclear and aviation -- two challenged
GE has considerable exposure to the nuclear power industry, and as
countries like Germany and Japan quickly sour on this energy
source, GE's power plant division starts to feel the brunt.
Countries like Japan aren't looking to build more fossil fuel
plants to offset expected shutdowns of nuclear plants. Instead,
they are calling on its companies and citizens to simply consume
GE is also a major player in aircraft engines, and that may not be
a very good place to be in coming years. Here in the United States,
major carriers such as
Delta Airlines (NYSE:
are starting to shrink their capacity (putting used planes onto the
re-sale market) and lowering long-term plans for orders of new
planes. Right now,
and Airbus are working through an ample
of new orders that were placed a year or two ago, but could
suddenly find a sharply-reduced backlog in 12-18 months if more
carriers decide to cancel those orders.
3. GE Capital is akin to a bank stock
GE saw its
plunge in the 2008 economic crisis because management had built up
with far too much debt. When the financial markets temporarily
seized up and GE warned it was facing a liquidity squeeze, panic
These days, GE has stepped back from the precipice, leaving its
balance sheet much less exposed to the overnight borrowings. But
these are tough times for any lender these days -- interest rates
are quite low both in the United States and Europe, dampening
spreads. The prospect of a bleak year in 2012 for both the United
States and Europe means GE Capital will continue to generate subpar
margins -- weaker than many sell-side analysts are currently
projecting, according to some short sellers.
4. Too much debt
At the height of the financial crisis, GE carried a scary amount of
-- $524 billion to be precise. This figure stands at $434 billion
today, which is manageable in the context of a slow-growing economy
or a mild global
, but a potentially disastrous amount of debt if the economy hits a
rougher patch than many economists currently expect. The short-term
portion of GE's long-term debt has risen from $118 billion to $153
billion in just the last six months, in a possible sign of
Will GE have to raise more capital to shore up its balance sheet?
If so, then this would be a lousy time to do so, in terms of
. Any capital raise is like manna from heaven from short-sellers,
because the mere announcement of such a move tends to push a stock
Risks to consider:
Short sellers appear to be targeting a major slowdown in the
global economy, and they're correct that this
highly-leveragedbusiness model would suffer in such an environment.
But it may be too soon to anticipate such gloom and doom. A return
to the crisis-like environment of 2008/2009 seems unlikely at this
point, largely because major financial institutions have shored up
their capital bases since then.
Action to Take -->
Why are short sellers so
while Wall Street analysts (the "
") appear largely bullish? It may be due to the fact that GE
provides a large amount of business to Wall Street firms, which are
loathe to alienate such a key customer.
The next two to three quarters will be crucial. If the European
debt crisis -- or any other exogenous shock -- roils the global
economic outlook, then short sellers are likely to profit from
their trade. Shares could also suffer from downward
revisions, which have thus far been largely maintained through this
summer of discontent. Analysts expect GE to boost sales at a very
slow 2% next year, but those forecasts could turn negative if the
U.S. and European economies recede.
Even if you're ill-inclined to short GE, this may be a bad time to
go long on the stock because the economic footing remains so
-- David Sterman
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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