Buffalo Wild Wings
Momentum stocks often are a target of short sellers. At some point, the music of profit growth stops. When the music stops, shares can tumble. The trick, of course, is timing. To the extent growth surpasses expectations, a short squeeze can occur.
Casual dining stock Buffalo Wild Wings (NASDAQ:BWLD) is a fast-growing business that has piqued the interest of short sellers. As of the end of September, nearly 13% of shares outstanding were sold short. Helping to cement the bear case was the company missing analyst estimates in the period ending June 30.
Prior to that miss, BWLD had exceeded estimates in the three quarters before that. With food prices lower and a consumer base that continued to spend, Buffalo Wild Wings is likely to beat expectations for the quarter ending Sept. 30. From a valuation perspective, shares are much less frothy. The stock trades for 22 times current-year estimated earnings. That also happens to be the rate Wall Street expects profits to grow in 2012. Stronger earnings could propel shares higher when the company reports results Wednesday.
The consensus of many is that the economy will slip into recession in the very near future. With negative GDP growth, many industries will suffer. Big-ticket items like automobiles will have to wait in such an environment. Car sales are likely to fall in a recession, hurting that sector.
AutoNation (NYSE:AN) is a heavily shorted stock. At the end of September, 18.5% of shares outstanding were being sold short. That is a lot of stock sold in advance of an expected decline. So far, the economy seems to be hanging tough. We might not be out of the woods, but the worst-case scenario might be off the table.
The shorting of AutoNation comes despite the company performing well on an operating basis. The company has exceeded analyst estimates in the past three quarters. Given that estimates for the current quarter have not budged during the past 90 days, another beat is possible. Wall Street is looking for the company to make 47 cents per share for the quarter ended Sept. 30.
Looking forward, Wall Street has low expectations for AutoNation. Profits are expected to grow by only 12%. AN shares are trading at a premium valuation, at 19 times earnings. That explains why there are so many shorts in this stock. It will take a strong report Thursday to shake them loose and create a short squeeze.