There are important things to keep in mind when it comes to heavily shorted stocks, particularly in a social media environment that has proven to be something close to a distortion field.
First, short sellers aren’t evil. They aren’t destroying companies. They’re betting against a stock price. Sometimes they make that case publicly. More often, they don’t.
Second, simply because they might be on the other side of the trade, they shouldn’t be ignored. Indeed, we have recent evidence for exactly that point.
A short seller warned investors about Luckin Coffee (OTCMKTS:LKNCY) before that company admitted to a massive fraud. The information brought to light surrounding electric semi manufacturer Nikola (NASDAQ:NKLA) was material yet wasn’t known to the market. Short sellers aren’t always right, but they aren’t always wrong, either.
Finally, owning heavily shorted stocks in hopes of a squeeze is a bad strategy. It worked for GameStop (NYSE:GME), certainly. But even the squeeze part of the trade was over before anyone even really understood what happened. High short interest alone doesn’t mean a short squeeze is on the way.
Some readers might disagree with some (or all) of these individual points. But they comprise a broader argument: owning heavily shorted stocks isn’t all that different than owning lightly shorted stocks.
Investors need to do due diligence. They need to avoid confirmation bias. And they need to have a bull case for the stocks they own.
These four heavily shorted stocks have that bull case:
- National Beverage (NASDAQ:FIZZ)
- World Wrestling Entertainment (NYSE:WWE)
- 1-800-Flowers.com (NASDAQ:FLWS)
- SmileDirectClub (NASDAQ:SDC)
Heavily Shorted Stocks: National Beverage (FIZZ)
The short interest in FIZZ is inflated somewhat by the fact that about three-quarters of the company remains owned by chief executive officer Nick Caporella. Short interest as a percentage of shares outstanding is only about 6.2%, but that figure soars to 32% of the float.
The bear case here seems to make some sense, and it centers on competition. FIZZ stock soared several years ago thanks to growth of its LaCroix sparkling water. That success brought in a wealth of new entrants, including Coca-Cola (NYSE:KO), PepsiCo (NASDAQ:PEP) and Nestle (OTCMKTS:NSRGY). Those competitors seemed to have a path to taking LaCroix’s market share or, at the very least, leading a “race to the bottom” in pricing that would pressure profit margins.
That competitive risk still looms. But LaCroix has held its own. The 12 months ending Jan. 30 saw revenue rise 10% and earnings per share jump 43%. That’s despite a pandemic that would seem to be only a modest tailwind at most, given LaCroix’s popularity in offices and during summer outings.
If the competition-based bear thesis doesn’t play out, FIZZ stock has upside. Valuation is reasonable. The balance sheet is pristine. Bulls long have argued the company makes sense as an acquisition target, and that argument still holds.
All told, the story seems stronger than shorts have argued and investors feared. As long as that remains the case, FIZZ should have upside.
World Wrestling Entertainment (WWE)
The story for WWE stock is somewhat similar.
A thin float, owing to the ownership by founder Vince McMahon, inflates short interest, which is just over 20% of the float. Skeptics have argued for years that disaster lurks just around the corner — yet the WWE business keeps grinding away.
The company’s creation of the WWE Network was widely panned — WWE stock lost about half of its value in a day — yet it turned out the company was actually ahead of the curve in streaming. The company now has leveraged that success into a partnership with Comcast (NASDAQ:CMCSA) and its Peacock streaming service.
There are risks. WWE’s big stars don’t shine quite as bright. The growth of mixed martial arts has added a new competitor for eyeballs and spending. The stock isn’t exactly cheap.
Still, betting on McMahon generally has been the right strategy, even if many short sellers argue otherwise at the moment.
Heavily Shorted Stocks: 1-800-Flowers.com (FLWS)
It’s somewhat unclear why FLWS continually makes the list of heavily shorted stocks. There are concerns, but none that generally rise to the point of being a catalyst for a short.
That said, shorts have done quite well of late, as FLWS stock has plunged from nearly $40 in late January to a current $31. After the pullback, the stock does look attractive.
The competitive environment is benign. 1-800-Flowers.com has run circles around rival FTD Companies for years, to the point that FTD filed for bankruptcy in 2019. The expansion beyond flowers has paid off, with acquisitions of Harry & David and PersonalizationMall.com both doing well.
The company obviously has dealt with pandemic-driven headwinds, but the long-term outlook still looks reasonably bright. An 18x forward price-earnings multiple looks attractive in that context. All told, it might be time for shorts to book profits.
On the other hand, SDC stock seems like a more obvious short target. The company remains unprofitable, sits behind industry leader Align Technology (NASDAQ:ALGN), and still has a market capitalization over $4 billion.
That profile highlights the risks. But the potential rewards are big as well.
Teledentistry would seem a market large enough for multiple winners. It’s also a market that got a boost from the pandemic.
Meanwhile, SmileDirectClub has managed to grow nicely of late. Profitability metrics are improving. The company seems to be on the right track — in a market that’s been patient with growth stocks.
It’s still possible that shorts are proven right over the long term. But it’s just as possible that they’re wrong, and in a big way.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.