At the end of September, investment commentator Mark Hulbert discussed the idea of the short-interest ratio affecting the general direction of the markets.
While some believe that a rising short-interest ratio is a bullish sign for stocks, others such as University of Utah finance professor Matthew Ringgenberg feel otherwise.
Ringgenberg believes that by monitoring short interest, which is defined as the number of shares being shorted in a given period, you gain greater insight into the long-term direction of a stock or the markets. In fact, it’s a much better predictor of future returns than traditional metrics such as price-to-earnings, etc.
“Short sellers are better informed on average than traders in general,” Ringgenberg told the Dallas News in 2015. “It’s a risky trade because their losses can be greater than the amount invested, and they have to pay a fee to borrow shares. So they are likely to trade only when they are confident in their position.”
Ringgenberg points to the massive correction in 2008 as a prime example. Higher than normal short interest in both 2006 and 2007 predicted the major declines that were to follow. The same is true in 2002, which saw a 45% decline after two years of unusually high short selling.
Regardless of which side of the argument you fall, I believe these 10 stocks to short are a good place to start if you’re looking to make some money betting against their future success.
Chesapeake Energy (CHK)
Independent oil and gas producer Chesapeake Energy (NYSE:CHK) has had a tough go of it in 2019, down 37.1% year to date through October 2.
As a result, it’s not surprising that CHK is one of 39 U.S.-listed stocks with a market cap exceeding $2 billion and more than 20% of its float currently shorted. Chesapeake has 279.9 million shares short or 24.96% of its float. It would take short sellers 5.1 days to cover their positions.
I’ve been skeptical about Chesapeake for a long time.
Back in August 2018, I called CHK a massive, overpriced risk. I was reacting to an analyst’s “buy” recommendation and a $10 target price. At the time it was trading around $4.30, well above its current price below $1.40.
My biggest concern with Chesapeake was, and still is, its balance sheet. In August 2018, its long-term debt was $9.2 billion or more than double its market cap. At the end of June, it was $9.7 billion or 4.5 times its market cap.
If you’re familiar with the Altman Z-Score, we’re getting into bankruptcy territory.
National Beverage (FIZZ)
National Beverage (NASDAQ:FIZZ), the people behind LaCroix sparkling water, isn’t faring much better than Chesapeake so far in 2019. It’s down 35.7% year to date through October 2.
Currently, FIZZ has a short interest of 7.4 million shares or 63.4% of its float. Based on an average daily volume of 439,480 shares, it would take short sellers 16.9 days to cover their positions.
A lawsuit was filed in June that claimed company president Joseph Caporella, son of CEO Nick Caporella, who owns 72% of FIZZ stock, exaggerated how safe LaCroix products were.
And while the news did put a dent in its share price, the bigger issue is how it’s going to compete against PepsiCo (NASDAQ:PEP), now that it’s started to put some muscle and money behind Bubly, and other larger beverage companies are entering the fray.
Years ago, I sold Jolt Cola. I watched it speed into the stratosphere, only to fizzle out as consumers realized coffee was a smarter way to get your caffeine fix.
Of all the stocks discussed in this article, Wayfair (NYSE:W) is the company that most confuses me. Despite losing boatloads of money, 14 analysts rate it a buy, one analyst rates it overweight, 13 give it a hold, with only three analysts giving it an underweight or sell rating.
Although W stock is up 14.4% year to date, it’s lost 28.2% over the past three months as investors came to realize that the tariffs imposed on Chinese goods imported into the U.S. by the company would be more expensive as a result, making its pathway to profitability even more difficult than it already was.
Wayfair has a short interest of 15.7 million shares or 25.4% of its float. It will take short sellers 8.0 days to cover their positions.
As long as Wayfair continues to spend too much on advertising — it spent $14.56 in advertising per active customer in the second quarter, 4.9% higher than in Q2 2018 — it’s easy to see why short-sellers find it attractive.
Seeking Alpha contributor Robert Manders recently called LendingTree (NASDAQ:TREE) “a low quality business at a terrifying valuation.” Trading at 4.6 times sales and 41.2 times its forward P/E, he might be right.
In May 2018, I wrote about seven CEOs who’ve delivered for shareholders over the long haul. LendingTree CEO and founder Doug Lebda was one of the names on the list. I included his name because he’d managed to generate a total return of 3,216% between March 7, 2010, and May 3, 2018.
Very few companies produce such generous returns.
And yet, TREE has a short interest of 1.74 million shares or 22.3% of its float. Short sellers would take 9.8 days to cover their positions.
If ever there were a short recommendation based on valuation, LendingTree would definitely be at the top of the list.
Luckin Coffee (LK)
Luckin Coffee (NASDAQ:LK) is one of China’s biggest growth stories, or at least it was when it went public in May at $17 a share. However, after moving as high as $27 in late July, it’s fallen back into the high teens as investors realize that it might not be the second coming of Starbucks (NASDAQ:SBUX) after all.
In early September, I called Luckin one of the worst IPOs of 2019, primarily because its first quarterly report was a dud. Its second quarter wasn’t much better losing $100.5 million from operations, 100.1% higher than in Q2 2018.
In fairness to Luckin, it’s a much bigger business today. At the end of the second quarter last year it had 624 stores. That was up to 2,963 stores by the end of Q2 2019.
Luckin currently has 15.4 million ADR shares outstanding.
Azul (NYSE:AZUL) is the largest airline in Brazil with 820 daily departures to 113 destinations including 74 Brazilian cities. In addition to destinations in Brazil, it also flies to Fort Lauderdale, Orlando, Lisbon, and Porto.
It’s had a good year on the markets generating a year to date total return of 25.6%, considerably better than its airline peers or the Brazilian market as a whole.
So, why the recommendation to short?
On September 26, Delta (NYSE:DAL) announced that it was investing $1.9 billion in return for a 20% stake in LATAM Airlines (NYSE:LTM). In addition, it is contributing another $350 million into its strategic partnership with LATAM, so that it has the best chance of success.
Together, Delta and LATAM will hold the leading position in five of the top six Latin American markets from the U.S. LATAM has 322 aircraft in its fleet and is the largest airline in Latin America with more than 1,300 flights daily.
Bringing Delta into the picture means trouble for all the other airlines operating in South America including Azul.
Over the past year, Mattel (NASDAQ:MAT) has lost 30% of its value as it struggles to recover from the Toys ‘R’ Us bankruptcy in 2018.
Currently, Mattel’s short interest is 76.5 million shares or 22.2% of its float. It would take short sellers 16.4 days to cover its short position, one of the highest short ratios on my list.
My InvestorPlace colleague, Vince Martin, recommended MAT as a possible stock to short in late July, pointing to the company’s tremendous debt. At the time, it was almost $3 billion. However, it was the fact that its debt was almost 10 times EBITDA that really reflected poorly on the company.
If not for the sales of its action figures from Toy Story 4 in the second quarter ended June 30, which rose by 23% excluding currency, Mattel would not have reported a 4% gain in sales for the quarter. Not even close.
With negative cash flow, it’s easy to see why its short ratio is so high.
Match Group (MTCH)
If you believe in the saying, “what goes up must come down,” online dating company Match Group (NASDAQ:MTCH) ought to be at the top of your shortlist. It’s up 69.2% year to date despite a 15% decline in the past 30 days.
Match Group’s short interest is 27.7 million shares at the moment, a high 51.3% of its float. As for its short ratio, it would take short sellers 12.3 days to cover their positions. It’s not the worst by any means, but it’s still in double digits.
On September 27, Match Group announced that it received a subpoena from the Department of Justice related to the Federal Trade Commission claims that the company used fake love interest advertisements to convince people to buy paid subscriptions.
“We believe that Match.com conned people into paying for subscriptions via messages the company knew were from scammers,” said Andrew Smith, the director of the FTC’s Bureau of Consumer Protection.
The owner of such dating sites as Tinder and OkCupid denies the allegations.
However, where there’s smoke, there’s fire.
Teladoc Health (TDOC)
Teladoc Health (NYSE:TDOC) provides 24-hour, on-demand digital healthcare via smartphones, internet, video, and phone. It makes money through subscription fees paid by employers on a per-member-per-month (PMPM) basis. In addition, some plans can be a combination of subscription access fees and fees per visit.
In fiscal 2018, Teladoc generated 84% of its revenue from subscription access fees and the rest from visit fees.
Since going public in July 2015, TDOC has gained 238% in the three years since, despite not making money in any of those years. Year to date it’s up 24.2%, significantly higher than the markets as a whole and its health information peers.
It currently has a short interest of 24.0 million shares or 33.7% of its float. It has a short ratio of 18.3 days.
As we’ve experienced in recent weeks, investors have become less enamored with money-losing unicorn IPOs resulting in poor first-day trading, or in the case of WeWork, the canceling of the IPO altogether.
With Teladoc not likely to make money for some time and possessing an exceptionally high short ratio, investors might come to the conclusion that it’s not just money-losing IPOs that deserve a dressing down.
The Medicines Co. (MDCO)
The maker of pharmaceutical products has the best year to date performance of all 10 stocks to shortlisted here, up 161.4%. That’s due, in part, to positive trial data for inclisiran, The Medicine Co.’s (NASDAQ:MDCO) potentially lucrative cholesterol drug that increases the time between injections to as much as six months from current drugs that require monthly injections.
MDCO sold off all of its marketed products and raised $650 million from investors so that it could get inclisiran to Phase 3 trials and commercialization. It was a gamble that so far seems like it could pay off.
However, it now has zero revenue and nothing but expenses.
In the first six months of fiscal 2019, MDCO had a net loss of $119.9 million or $1.62 a share. If something happens to derail all of the good news surrounding inclisiran, the company is likely finished.
Perhaps that’s why it has a short interest of 23.05 million shares or 30.5% of its float. As for its short ratio, short-sellers would take 11.1 days to cover their positions.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.