When can negativity be used for something positive? Well, in the market, a quick look at the most shorted stocks could unearth potential.
The typical investor's approach to the market is buying low, then selling high. This simple approach also is the wisest for most buy-and-holders in that it allows them to ride the market's natural long-term tendency to edge its way ever higher.
But investors also can first sell high, then buy that stock back in the future at (hopefully) a lower price. The practice is called short selling: selling shares you don't own yet, knowing you must buy them back in the future to close out your trade.
It's not for the faint of heart. The risk in short sales is theoretically infinite because a stock's price can continue rising in perpetuity. A trader eventually will have to buy a stock he or she has shorted to close a short position out, and sometimes because the stock's price is moving higher, not lower. When some short trades are dire enough, the brokerage firm handling the trade will force the buyback.
These forced buybacks also create opportunities for more conventional investors. The most shorted stocks also have built-in armies of buyers waiting in the wings. If they're pushed hard enough by fear of losses stemming from a rising stock price, they'll "cover" their short positions - by buying the stock - fanning already bullish flames.
Here are 10 of the stock market's most shorted stocks. While a large chunk of Wall Street is bearish on these names, the potential for a wave of short-covering is on the table.
Advanced Micro Devices
Market value: $18.1 billion
Shares shorted: 161.5 million
Short % of float: 22.2%
Advanced Micro Devices ( AMD , $19.42) semi-shocked the world just a few days ago by topping second-quarter earnings estimates and logging its most profitable quarter for the past seven years. The 21% gain reaped since that report translates into more than a doubler since April's low.
The scope of the advance is understandable in light of the turnaround story Advanced Micro Devices has become. But the unbridled bullishness has created a not-often-seen situation: The current price of AMD stock, near $19.40, is well above the consensus price target of $17.54 (and median of $16.50). It's rare because the analyst community tends to push their collective targets upward before a stock has a chance of reaching that consensus value.
Something else curious about the analyst community's opinion of AMD: Despite the earnings beat and rocket-like momentum, the average rating on Advanced Micro Devices shares has moved away from a "buy," toward a "hold." It's slight, but measurable all the same.
These details haven't been lost on speculators. The most recent tally indicates that 161.5 million shares of AMD, or more than 22% of the total number of shares in the float, are sold short. That's a clear message of doubt.
However, of the 10 most shorted stocks in focus, a well-loved Advanced Micro Devices faces the strongest potential of being catapulted higher by a short squeeze. In fact, because publicly available short-interest data is typically several weeks old, it's likely that some of AMD's recent rally can be attributed to short covering.
Market value: $2.0 billion
Shares shorted: 12.8 million
Short % of float: 24.9%
AMC Entertainment ( AMC , $15.35) is the parent company of the United States' and Europe's largest chain of theaters, boasting more than 1000 locations and 11,000 screens.
Theaters once were a great business to be in, as it was the only alternative to predictable cable television for patrons just looking to escape from reality for a couple of hours. But the advent of on-demand video options - and the creation of content that's just as good as the silver screen's and is intended to keep people away from theaters - has proven problematic.
The movie industry (including AMC Entertainment) has pushed back. AMC is one of a handful of theater chains to offer subscription-based access to as many as three movies per month at its theaters for a seemingly reasonable price of $19.95 per month. Consumers are struggling to justify the cost relative to the value, though. Seeing 36 flicks per year to extract the program's maximum value is actually a bit daunting.
A lower-priced option that offers slightly less access? It has been tried at $10 per month, but as the 99.99% 52-week decline in MoviePass parent Helios and Matheson Analytics ( HMNY ) indicates ... that model failed, too.
Theatrical releases just aren't the big deal they used to be. That's why a quarter of AMC Entertainment's shares have been shorted. The trade hasn't paid off yet, but the stock's tepid forward progress suggests it soon could ... at least without some sort of Errol Flynn-like rescue.
Bed Bath & Beyond
Market value: $2.6 billion
Shares shorted: 29.0 million
Short % of float: 24.2%
Bed Bath & Beyond ( BBBY , $19.40) belongs on a list of retailers that largely have outlived their relativity. And unlike some higher-tier home-goods rivals, Bed Bath can't even leverage an air of exclusivity to draw a crowd.
That premise has been showing up in Bed Bath's finances and is expected to continue doing so. Analysts estimate that last year's per-share profit of $3.12 will shrink to $2.28 this year, then $1.98 in 2019. There are no expectations for sales growth - just contraction.
Part of that weakness can be chalked up to the cost-cutting program taken on in earnest last year. Culling $150 million in expenses seems easy enough, but such cuts often take an unexpected toll. In the meantime, Raymond James was just one of several research outfits that expressed concern in April about the costs Bed Bath is incurring to implement initiatives such as better technology and the development of new store concepts.
JPMorgan's analysts were more blunt, writing at the time, "In our view, it appears that everything is 'being thrown against the wall' with hope that a few things will stick."
Thus, it should be no surprise that BBBY is among the market's most shorted stocks right now. And it won't become a short-squeeze opportunity until the retailer can prove that organic growth is in its future.
Campbell Soup Company
Market value: $12.4 billion
Shares shorted: 38.4 million
Short % of float: 21.9%
Who bets against soup?
Enough people to hold 38.4 million shares of Campbell Soup Company ( CPB , $40.94) short. That's who.
Actually, investors' doubts make a fair amount of sense. Although Campbell Soup cans were a common staple in most American pantries for most of the past few decades, younger up-and-coming consumers aren't nearly as brand-loyal as their parents. Indeed, many are making a point of not using big, familiar brands, not just because they want to escape mom and dad's influence, but because they tend to veer away from big brands and shop for something a bit more eclectic.
Not that soup is all Campbell offers anymore, but canned soup itself is falling out of favor, too.
But short sellers might want to keep a close eye on the company's maneuvering. Well-aware of its woes, Campbell has been scrutinizing every aspect of its existence and future, making clear there are "no sacred cows" that it won't change or let go. The introspection's findings are slated for release sometime in August. If it looks like a legitimate turnaround is in the cards, the short percentage of nearly 22% of the float might be just enough to fan the flames of a turnaround.
Market value: $12.4 billion
Shares shorted: 27.0 million
Short % of float: 20.7%
Kohl's ( KSS , $73.74) is another retailer that Wall Street is betting against, with more than a fifth of its float presently held as a short position.
Amazon.com ( AMZN ) gets a fair amount of the credit/blame, and rightfully so. The online retailer has waded into apparel waters, after all. But relatively new online competition isn't the only headwind facing Kohl's.
The company's value-minded, experience-focused mix of marketing and merchandise has kept the company in a dangerous, unappealing no-man's land. It's neither a bargain-basement retailer like TJX Cos.' ( TJX ) T.J.Maxx, nor is it a Macy's ( M ). Consumers changed, but the company didn't, and the generation of consumers now entering their high-consumption years don't quite understand how Kohl's fits in. The decision to add Aldi grocery space to select stores might seem creative, but it also could be seen as an indication of just how desperate the company has become.
Investors might want to hold off on outright betting against Kohl's, however. Same-store sales for the first quarter of this year were up 3.6% versus expectations of only 2.7%, suggesting that some of the organization's initiatives are in fact gaining traction.
Market value: $2.3 billion
Shares shorted: 7.1 million
Short % of float: 32.5%
It's not difficult to understand why investors have placed burger chain Shake Shack ( SHAK , $61.95) among America's most shorted stocks. The company's hamburgers and milkshakes are fantastic, but they don't exactly align with the nation's growing degree of health-mindedness. And with an average ticket size north of $10 per visit (closer to $15 in some cases), marketability comes into question. Never even mind the hyper-aggressive expansion spending in an environment where labor and supplies are becoming uncomfortably expensive.
Yet, since late last year, SHAK stock has decisively defied the company's critics. They've rallied more than 100% above September's low on the heels of tremendous top- and bottom-line growth.
The big move has translated into an unusually high forward price-to-earnings ratio of 84 times analysts' estimates for next year's earnings. Several observers simply don't think that premium price will persist for long.
Mike Sedlak, CFA and managing member with Illinois-based Golden Trail Advisers, is one of those doubters. He says, "Weak same-store sales could slow down expansion plans. Anecdotally, there are more and more choices in the fast-casual burger segment, so it seemed likely that there would be further misses down the road." Sedlak adds, "With the recent run-up in price, however, the stock seems even more vulnerable to any miss in sales, earnings or same-store sales."
Short sellers may be vindicated in the end, but they can't afford to be wrong. With nearly a third of the stock's float held as short positions by speculators, another round of gains could force that crowd to cover their short positions in a hurry.
Market value: $49.8 billion
Shares shorted: 34.7 million
Short % of float: 29.6%
Most investors don't have a strong opinion either way about most stocks. But almost every investor has a strong opinion about electric vehicle company Tesla ( TSLA , $290.17), however - and a huge swath of them put their money where their mouth is. The latest data says 34.7 million shares of TSLA were held as a short position, or nearly 30% of the total shares in investors' hands.
While Tesla largely brought electric vehicles into the mainstream, paving the way for rivals, the company has never turned a sustainable profit according to generally acceptable accounting principles (GAAP). It rarely has driven positive operating cash flow.
Investors can be patient, knowing game-changing ventures can take time to bear fruit. But this is a case where the more Tesla scales up, the more money it seems to burn, with little fiscal success to show for it once the smoke clears.
Building a significant number of Model 3 vehicles in a big tent behind the permanent Fremont, California, factory isn't exactly comforting to shareholders either.
Many investors are wondering if they've been sold a dream. While the sizable short interest is potential fuel for the buying fire, that fire will be tough to spark given how many people have been burned (more than once) by CEO Elon Musk's overpromising and underdelivering.
Market value: $59.1 billion
Shares shorted: 11.3 million
Short % of float: 15.0%
VMware ( VMW , $144.42) isn't exactly a household name, though it's known within corporate technology circles. The company solves a bevy of headaches brought on by the advent of newer computing environments and cloud computing itself. It can make certain apps and software function on operating systems not natively designed to support that program; put differently, a lot of obsolete software can remain relevant.
VMware is a tough stock to get a read on. Only about 3% of its issued, outstanding shares are held short, which isn't troubling in the least. Thing is, 80% of VMWare shares are actually owned by computer company Dell, and Dell isn't looking to get rid of any shares. The percentage of the float (shares available for trading) is 15% - more than enough to jump-start a short squeeze if it appears VMW is setting up a rally.
Such a catalyst may be in the offing. Rumors surfaced in early July that Dell was looking to acquire the portion of VMware it doesn't yet own. It didn't quite do that, instead opting to acquire the tracking stock intended to reflect the value of the Dell/VMware venture.
Some experts believe the decision still points to an eventual buyout of VMware itself. The company's board has already proven picky, though, so if it's going to happen, it will require a healthy offer.
Market value: $9.8 billion
Shares shorted: 10.4 million
Short % of float: 25.8%
You've seen the (often annoying) commercials, and investors have seen the often alarming results that e-commerce player Wayfair ( W , $109.67) has posted. Sales, and sales growth, haven't been a problem, but profits have proven problematic. Namely, Wayfair doesn't generate profits, and analysts don't expect the company to anytime soon.
Wayfair's top line is projected to swell a healthy 39% this year. But that scale-up will also swell the company's losses, from 2017's $1.97 in per-share red ink to $3.01 this year. Analysts expect that loss to be pared back to only $2.25 in 2019, but that's a dangerous expectation. Wayfair has fallen short of estimates in each of its past three reported quarters, and there's no guarantee the pros aren't overestimating how well the company may do in the foreseeable future.
It's also worth entertaining the possibility that Wayfair will never be able to truly compete with the king of e-commerce, Amazon.com. Amazon is the biggest and the best in the business, with a head start of more than a decade. And even then, its e-commerce arm still is only marginally profitable; less than 6% of its prior-quarter's U.S. e-commerce revenue was converted into an operating profit, and there still are more expenses to deduct from that figure.
All of a sudden, Wayfair's path to profitability looks all the more bleak ... and the quarter of the float sold short makes a lot more sense.
Market value: $4.9 billion
Shares shorted: 19.3 million
Short % of float: 26.2%
It's not stunning that Williams-Sonoma ( WSM , $58.80) has been heavily shorted. Not only is it a retailer caught in remnants of the so-called retail apocalypse, but it's a high-end home goods retailer trying to thrive in an environment where luxury and possessions don't stoke consumers like they used to.
What is surprising is just how heavily traders have bet against Williams-Sonoma. More than 26% of its shares in action are sold short in the shadow of its 26% gain over the past 12 months.
Seth Basham, Managing Director of Equity Research for Wedbush Securities, explains, "A paradigm shift to home furnishings shopping online at companies including Wayfair and Amazon and at value-centric bricks & mortar retailers including HomeGoods and AtHome will continue to challenge WSM's and BBBY's business models. Their brands alone are not strong enough to drive premium-priced sales, leaving the companies to heavily invest in sharper pricing, promotions, heavier advertising and digital capabilities, thereby pressuring profitability."
Translation: Sooner or later, the high-end, in-store shtick is going to wear too thin with would-be shoppers. Next year's projected sales growth of 1.7% implies that time could be coming soon.
WSM's short sellers are counting on it.