A look at the most shorted stocks can be helpful to investors, whether they are betting in favor of the stock rising or trying to profit from its decline.
That’s because when short interest is high, there’s also a high chance of volatility. Obviously if a lot of bearish investors are piling into short positions, that is a measure of negative sentiment … but if a stock with high short interest just manages to post a glimmer of hope, a “short squeeze” can prompt a spectacular rally as short sellers rush to cover their positions and buy back the stock.
Depending on which side of the trade you’re on, you can either make a big profit or feel a lot of pain in a stock that has high short interest.
But one thing that’s universally true is that if you have any stake whatsoever in these heavily shorted S&P 500 stocks, either through a direct investment or through an index fund, you should be aware of what is going on and the potential for big volatility in these companies.
The following is a list of the most heavily shorted stocks in the S&P 500, as measured by short interest (that is, shares held short as a percentage of total shares available for trading) as of mid-July:
Most Hated Stocks #10 – Verisign (VRSN)
Verisign (VRSN) is an Internet stock that focuses on security and access for websites of all shapes and sizes, including portals for employees accessing internal corporate networks for work, e-commerce sites where customers need to log in to make a sale and everything in between.
The general business of Verisign seems like a no-brainer in the age of rapid online growth. However, the stock ran up dramatically from under $20 in mid-2009 to more than $60 a share at the beginning of this year. Investors then started to get quite concerned that growth wouldn’t keep up with expectations, and VRSN stock crashed from January through the spring.
However, strong Q2 earnings just a few days ago caused a big snap-back in Verisign. Despite still being in the red year-to-date, the Internet security company is up double digits since July 24 and seems to have recently squeezed out some of the shorts betting against it just a few weeks ago.
Where VRSN goes from here is anyone’s guess, but expect continued volatility for Verisign stock as the company looks to square profits with expectations after a big run over the last few years.
Most Hated Stocks #9 – Weyerhaeuser (WY)
If you want an unsexy S&P component, it’s harder to get more boring than Weyerhaeuser (WY). The majority of the company’s business efforts are growing trees, cutting them down and selling the lumber and pulp.
Not much innovation there!
However, Weyerhauser also got involved directly with homebuilding and real estate a few years back — an area that obviously didn’t pan out too well for the company during the mortgage crisis.
WY stock has been gutted from its 2007 highs thanks to the housing crash sapping demand for lumber. Adding insult to injury was the slow-and-steady company slashed its dividends and gave investors little incentive to stick around.
But since then, Weyerhaeuser has been working to divest itself of its real estate arm to Tri Point Homes (TPH) and get back to the business of trees – even if lumber still is pretty closely linked with housing without that exposure.
The bear case seems obvious, given the cyclical nature of the business and the fears that housing is getting overheated. However, the bulls have some room to run too; full-year 2013 revenue was up 37% from fiscal 2011, the company has a modest debt load and a decent dividend of 2.7%.
Weyerhaeuser seems to be another one of those stocks like Lumber Liquidators (LL) that has become the most fashionable way to vote on the prospects of the housing market. If housing rolls over again, expect WY stock to roll over too even without its direct real estate business … but if housing continues to go strong, the shorts could be sorely disappointed as the upward trend in revenue and profits continues as this sleepy lumber outfit gets back to its roots.
Most Hated Stocks #8 – Frontier Communications (FTR)
The deal is just one more way this tenacious telecom is holding on despite the march toward wireless and high-speed Internet. Frontier is a low-tech telecom by most accounts, focusing on rural areas and landline services for voice and data. But FTR stock has been far from a pariah, outperforming the S&P index four-fold in 2014 as the company continues to post decent revenue and pay out a juicy dividend yield of over 6.7% at current pricing.
The million-dollar question, of course, is whether Frontier can keep this act up. The dividend of 10 cents per share per quarter is significantly above the 11 cents in total earnings per share posted last year, but significantly below the 23 cents per share in projected fiscal 2014 earnings.
If that dividend disappears? Look out below!
But as the outperformance in 2014 so far shows, it’s anybody’s guess when the music will stop. Until then, folks who have been capturing a decent yield and riding FTR stock higher have had a pretty good return on their investments over the last year or two.
Most Hated Stocks #7 – Transocean (RIG)
You may remember Transocean (RIG) from the Deepwater Horizon debacle that killed 11 workers, caused the biggest offshort oil spill in U.S. history and resulted in a massive $1 billion judgment against Transocean stock last year.
Aside from the big hit to the balance sheet, the decline in standing for Transocean’s brand was noteworthy. It went from being the pre-emininent offshore drilling rig contractor to a company that some businesses were a bit leery of.
As a result, revenue remains under 2010 levels despite oil prices creeping higher and the hopes of a continued global recovery fueling demand for energy at home and abroad. Shares are down 50% from their 2010 highs, and more recently have declined 16% year-to-date in 2014.
Why? Well, there are concerns that its massive 7.2% dividend is unsustainable given that it was just increased to 75 cents per share or $3 annually. Transocean is projected to earn roughly $4 per share this year but only about $3.50 next year — not leaving a lot of room for error.
If the company can’t get its drilling business back up into growth mode, it could get ugly for RIG stock. However, revenue has admittedly increased for five of the last six quarters … so time will tell if the pain is past or not in Transocean.
Most Hated Stocks #6 – ADT Corp. (ADT)
ADT Corp. (ADT) is a security business that helps monitor homes and businesses in the U.S. and Canada. The company was spun off of industrial giant Tyco International (TYC) in 2012, and aside from an initial pop in shares late that year it has been downhill ever since for ADT.
The biggest reason is stagnant revenue, with the company doing about $3.1 billion in revenue in fiscal 2011 but projected to take in only about $3.4 billion across all of 2014 – a less than 10% increase in revenue across three full years of business.
The big pain hit in January of this year, however, as shares cratered 17% in a single day after ugly quarterly earnings.
However, insiders started buying shares aggressively soon after and ADT stock has recovered modestly to over $33 from a 52-week low of under $28 a share.
Enter the short sellers!
The bears clearly think the insiders are naïve company men who don’t understand the painful future ADT has in store for itself across the rest of this year. The bulls, however, believe in the stability of the company and its 2.4% dividend yield.
We’ll see if ADT can continue to claw back across the rest of this year, or whether the short sellers are right.
Most Hated Stocks #5 – CBS Corp. (CBS)
CBS Corp. (CBS) has been off to the races since 2009. After trading as low as $6 a share in the bear market lows, the stock is up roughly 10-fold to about $58 currently.
CBS has been quite busy over the last several years restructuring its business for a digital age, divesting itself of theme parks and local broadcasting stations as well as buying tech portal CNET and the TV Guide franchise of properties. Investors have ridden the moves to big results as revenue and profits have moved steadily higher in a relatively difficult media environment.
But the bloom might be off the rose as short interest in CBS continues to rise, and growth starts to get more challenging for the media giant in the face of streaming video and radio competition. While the company appears fairly valued at a forward price-to-earnings ratio of about 14.5 based on FY2015 forecasts, you never can tell how the advertising space could shift or what competition may do to CBS.
Bears seem to think that the company is overvalued and has run out of tricks, hence the 10% decline this year in the face of an upwards-trending market. Of course, the company does have a reliable cash flow and very manageable debt load — not to mention a dividend that is just 13% of earnings and ripe for an increase.
Like many of the other stocks on this list, CBS is worth watching as it faces a tug of war between the short-sellers and the bulls in the months ahead.
Most Hated Stocks #4 – Joy Global (JOY)
Joy Global (JOY) is a heavy machinery manufacturer that is focused mainly on the mining industry. While Joy admittedly is one of the world leaders in this space, the commodity market simply hasn’t cooperated with metals and mining companies in the last few years … and that has resulted in very low demand for Joy Global equipment.
Shares of JOY stock are down over 30% from mid-2011 levels as a result, though admittedly shares have seen a bit of strength in 2014. The bears seem to think that this is just a head-fake, however, and have started selling the mining machinery company short en masse.
While it might be logical to be against a resurgence in mining given the weakness in commodity prices, America’s war on coal and the sluggishness of the global recovery, it’s worth noting that JOY is now pretty fairly valued at a forward price-to-earnings ratio of 16.5 and recently increased its dividend for the first time since 2008. There’s also takeover chatter regarding $250 billion machinery megacap Atlas Copco (ATLKY) that has been driving share prices higher.
But if a buyout fails to materialize, the mining industry continues to suffer and the market starts to get leery of these valuations, then it could be another leg down for JOY stock later this year.
Most Hated Stocks #3 – Diamond Offshore (DO)
Diamond Offshore Drilling (DO) is a cousin of the aforementioned Transocean, focused on offshore oil and gas drilling. And like Transocean, Diamond has been having a rather rough go of things since early 2011 or so.
The rather rangebound status of crude oil and the weak pricing for natural gas have made it hard to get enthusiastic about expensive deepwater drilling — particularly when onshore fracking is giving cheaper access to abundant supplies of gas and oil.
Overcapacity and weak pricing is not exactly a formula for success in any industry.
But after moving pretty much sideways across 2012 and 2013, there seems to be a big tussle over the future of Diamond Offshore in 2014. Shares ended 2012 at nearly $70 a share, but bottomed in the low $40s back in March. DO stock is now splitting the difference around $47 a share and investors seem to be feuding over whether the driller will go up or down from here as volatility has picked up as of late.
Recent earnings aren’t giving much ammo for the bulls or the bears, as revenue remains flat and profits for Diamond will dip slightly in 2014 but pick up pretty significantly in 2015.
The real story is whether the company is positioned correctly for the long-term as it build new drillships and adds new capacity growing forward.
If Diamond is in fact right-sized after some of the recent pain and now poised for growth again, that’s good for the bulls … but if this company is still facing the same pressures it has been for the last few years, investors might resume selling off (or shorting) DO quite soon.
Most Hated Stocks #2 – Cablevision Systems (CVC)
Cablevision (CVC) is another old-school telecom that is hanging on despite the era of mega-merger proposals, wireless growth and streaming video prompting cord-cutting among younger Americans.
The company is one of the top 10 cable providers in the U.S., with most customers in the New York-New Jersey-Philadelphia region. The company boasted 3.2 million total customers at the end of 2013, with 2.8 million of those holding a video subscription.
The bearish argument against Cablevision is clear, as bigger companies like Time Warner Cable (TWC) and Comcast (CMCSA) continue to consolidate power. If even these cable giants aren’t safe from the pressures of streaming video growth thanks to the likes of Netflix (NFLX), where does that leave tiny Cablevision?
Throw in the fact that its 60 cents in annual dividends might not be sustainable given that annual earnings aren’t projected to meet 60 cents a share until next year — and that’s if all goes well — and this seems like a risky play.
However, with telecom consolidation there’s a chance someone else will snap up Cablevision at a premium and put the screws to the short sellers. There’s also a chance that Cablevision will continue to plod along with reasonably flat revenue and no real deathblow for another several years.
The shorts are clearly betting on the bearish case winning out in the short term, so CVC will be a stock worth watching the rest of the year.
Most Hated Stocks #1 – GameStop (GME)
GameStop (GME) is one of those retail stocks that investors simply love to hate, because the pressures on this company are obvious and severe. And it looks like short pressure is getting to GME already, what with a sudden 7% drop in midday Tuesday trading after Electronic Arts (EA) announced an online subscription service.
First, there’s the general pressure on all retailers amid sluggish consumer spending.
Then, there’s the margin issues in retail as prices are kept low to lure customers and fend off online competition from Amazon (AMZN) and others.
Also, you have the unique challenges of downloadable video games, both for smartphones and directly to consoles like the Microsoft (MSFT) Xbox, that eliminate the need for a physical game to be sold to a customers.
Throw in the fact that GameStop’s bread-and-butter has long been used video games — a segment of the gaming market that is under constant threat from publishers who don’t like their titles resold – and it’s a pretty hostile space for GME stock.
However, unlike other troubled merchants, GameStop isn’t bleeding red ink. The company is comfortably profitable and can easily support its good 3.08% dividend yield. The company also took big steps to restructure this year, closing 120 stores in an effort to adapt to the changing video game environment.
Will that be enough to right the ship? We’ll have to see … but it’s undeniable that in the face of these pros, the short sellers are focused very much on the cons that could create trouble for GME stock this year.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.