Shorting stocks can be a dangerous game. Investors should remember that shorting isn’t just the reverse of buying stocks.
The long-term bias of the stock market is for stocks to rise. Thus, if you are shorting a stock, you are betting on a decline due to some short-term factors that you believe will drive it down (such as an earnings miss or bad publicity), or a long-term bet that the company is under pressure and will be for some time to come.
Personally, I rarely short stocks. I only do so if I believe some bad news is coming down the pike for a company or industry, or if I believe a business is truly unsustainable and not a momentum stock.
As for these stocks in the Nasdaq 100, I don’t entirely see the logic behind the high short interest, which may mean it’s a contrarian indicator. In that case, the high short interest may find itself stuck in a short squeeze.
Short Squeeze Candidates — Paychex, Inc. (PAYX)
Paychex, Inc. (PAYX) is the tenth most heavily shorted stock in the Nasdaq 100 … and one of the big payroll and accounting firms globally. The company has $5 billion in cash and no debt, so the balance sheet looks great. With $15 per share in cash, the effective stock price is around $27. Free cash flow is always robust, and PAYX stock just raised its dividend.
The only reason for the short must be valuation. With long-term EPS growth pegged at 9%, this stalwart should trade at around $16, with maybe a premium for its cash position. Thus, it’s arguably 50% overvalued, creating doubt as to its valuation.
When you add in the fact that a lot of insiders sold big batches of shares earlier this year, it adds credence to the valuation call. Of course, with a heavily shorted stock, valuation may not mean anything. Plenty of stocks are overvalued but just keep moving higher. I expect PAYX to be one of them, prompting a short squeeze.
Short interest is 17.7 million shares as of last report, which is about 5% of the float, and would take 12 days to cover.
Short Squeeze Candidates — SiriusXM Holdings, Inc. (SIRI)
SiriusXM Holdings, Inc. (SIRI) seems to be a stock with perpetually high short interest. Sure, it’s trading at 43x earnings, but it has insanely good free cash flow.
I just don’t want to be on the other side of a trade that John Malone has ownership in. He’s one of the smartest investors in history. But the stock didn’t take to his buyout offer, and that makes me wonder if it was just too low, or if there is risk in SIRI stock that investors aren’t seeing.
I don’t see anything fundamentally wrong here, so my assumption is this is a case of “the short interest pig pile,” where everyone just shorts it to make a few pennies at a time. Beyond that, perhaps there’s an argument that free streaming music sites are going to encroach on SIRI stock’s barrier to entry. I just don’t know if those other sites are viable threats, however. If SIRI manages to break through anyway, expect a short squeeze to boost the stock.
Short interest is 297 million shares as of last report, which is about 12% of the float, and would take 5 days to cover.
Short Squeeze Candidates — Intel (INTC)
I think you must be crazy to short Intel (INTC). The company remains a near-monopoly chip supplier and has long since expanded into other areas. Intel has phenomenal gross margins of 60%, more than 12 billion in net cash and generates $10 billion in annual FCF. INTC stock is a stalwart with 8% annualized EPS growth, and is a dividend mainstay for hundreds of mutual funds.
I go back to valuation. The high short interest may be the result of Intel hovering around 16x earnings on what could only generously be provided an 11x valuation. But a short squeeze seems unlikely since Intel tends not to move in big leaps.
Perhaps the short case here has to do with the weak revenue growth and the $20 billion in expenses the company generates on R&D and SG&A. Perhaps investors remember the company weak FY12 and FY13 and aren’t convinced to jump back in.
Short interest is 135 million shares as of last report, which is about 3% of the float, and would take 3 days to cover.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.