In the latest NASDAQ-100 short ratio rankings (short interest/float), several technology shares witnessed an increase in short interest, with the number of shorted shares exceeding levels seen during the past twelve months. Such list includes Intel Corporation (INTC), Adobe Systems Inc. (ADBE), Seagate Technology Public Limited Company (STX) and Apple, Inc. (AAPL). Cisco Systems Inc. (CSCO) also witnessed a substantial increase of 16.5% in short interest. Although for some of these companies their short ratio remains somewhat moderate, including Apple and Cisco, is the technology sector and its bellwether companies falling out of favor, or is this a temporary phenomenon creating a potential buying opportunity?
Intel's short interest has just surpassed 200 million shares, with its short ratio ranking (short interest/float) gaining 4 spots to 36 during the past two weeks (whereby a short ratio ranking of 1 reflects the highest short ratio, and a short ratio ranking of 100 reflects the lowest short ratio). Intel's short ratio has increased from 3.65% to 4.03% due to a 10% rise in its short interest.
Intel shares are currently down 14.23% year-to-date, from $24.25 on 12/30/11 to $20.80 on 11/9/12. With current analysts' earnings estimates at $2.11/share for the year ending December 2012 and $1.97/share for the year ending December 2013, Intel has a P/E ratio of 9.86 and 10.56 respectively. Such P/E ratios are quite attractive, although Intel has yet to provide a more certain outlook for its earnings future. Intel's earnings estimates have consistently been revised lower during the past 90 days, whereby 90 days ago they were $2.39/share for 2012 and $2.55/share for 2013.
Intel's rising short interest has been consistent with the downward revision of its future earnings expectations. As evident from the above two charts, as Intel's share price has consistently dropped since April, its short interest has consistently risen. In a sense, Intel's increase in short interest has actually been a simultaneous, or lagging effect to its diminishing earnings expectations.
Given Intel's current attractive valuation from the perspective of its P/E ratio, this may be a good buying opportunity of Intel shares, although investors may also want to get confirmation that further downward revisions to earnings expectations are unlikely. Intel's current short ratio of over 4% may also provide support for a possible short covering rally in case of earnings stabilization.
Adobe Systems Inc.
Although Adobe is currently ranked 40 in short ratio rankings (whereby a ranking of 1 reflects the highest ratio), it has actually moved up 9 notches during the last two weeks from its previous rank of 49. Adobe currently has a short ratio (short interest/float) of 3.57%, vs. its previous ratio of 2.93%, due to a 21.77% rise in its short interest.
Adobe shares are currently up 16.4% year-to-date, from $28.27 on 12/30/11 to $32.90 on 11/9/12. With current analysts' earnings estimates at $2.31/share for the year ending November 2012 and $2.36/share for the year ending November 2013, Adobe boasts a P/E ratio of 14.24 and 13.94 respectively. Such P/E ratios are somewhat reasonable given the current low interest rate environment, although it is important to note that Adobe's earnings estimates have been lowered during the past 60 days from $2.42/share for 2012 and $2.63/share for 2013.
It is also important to note from the above two charts that although Adobe's short interest spiked higher in November of 2011, its shares had actually appreciated substantially between such date and April 2012. Given Adobe's reasonable valuation driven by its forward P/E ratio of 13.94, as well as previous spikes in its short ratio, we do not believe that the current spike in Adobe's short interest is necessarily indicative of additional future selling pressures.
As a matter of a fact, given its reasonable valuation, and our expectation for a stronger economy during Obama's second term as discussed in our article of November 7, 2012, "Obama win effect: cash rich companies will lead economic boom," we believe last year's scenario may repeat itself for Adobe, although historical performance is not necessarily indicative of future performance.
Seagate Technology Public Limited Company
Seagate's short interest has increased by 18.6%, causing its rank to move up to 12, with a short ratio of 9.05%, from 16 where it had a short ratio of 7.63% two seeks ago. Seagate's elevated short ratio could actually cause a short covering rally in case of any positive news development.
Seagate shares are currently up 77.6% year-to-date, from $16.40 on 12/30/11 to $29.06 on 11/9/12. With current analysts' earnings estimates at $5.29/share for the year ending June 2013 and $5.61/share for the year ending June 2014, Seagate boasts a P/E ratio of 5.50 and 5.18 respectively. Such P/E ratios seem extremely attractive, although potential volatility in such earnings, as well as Seagate's sensitivity to the overall economic environment are contributing factors to such valuation.
As we currently believe that there is a good possibility for the economy to do well during Obama's second term, in addition to Seagate's attractive P/E ratio, its current elevated short ratio could provide further boost to Seagate's shares, although year-to-date gains of over 77% could limit substantial additional upside.
Cisco Systems Inc.
Cisco's short interest ranking is 83, with short ratio of only 1.22%. However, it is noteworthy that Cisco's ranking has jumped from 91 to 83 due to a rise of 16.5% in short interest from two weeks ago.
Cisco shares are currently down 6.97% year-to-date, from $18.08 on 12/30/11 to $16.82 on 11/9/12. With current analysts' earnings estimates at $1.94/share for the year ending July 2013 and $2.08/share for the year ending July 2014, Cisco boasts a P/E ratio of 8.67 and 8.09 respectively. Cisco's market capitalization is about $89 billion, while its cash and investments are estimated at about $49 billion. Cisco's P/E ratio of 8.09 is attractive, while excluding its cash and investments, such P/E ratio would be even more enticing.
During the past year, when Cisco's short interest had a noticeable increase in May and June, Cisco shares dropped into the third week of July, as evident in the above charts. However such drop in Cisco's shares proved short lived, as its shares appreciated from $15.12 on July 24, 2012 to over $19 during the first week of September.
Given Cisco's extremely attractive valuation from the perspective of its low P/E ratio and its cash rich position, we do not believe that the recent increase in short interest is necessarily indicative of further declines in the price of Cisco shares in the upcoming future. Meanwhile, the current drop of 6.97% in Cisco shares year-to-date may also prove to be a good buying opportunity.
Apple's short interest has steadily risen recently. Although its short ratio is only 1.8%, with a ranking of 70, its short interest has risen to 16.88 million shares, its highest level during the past twelve months.
Apple shares are currently up 35.1% year-to-date, from $405 on 12/30/11 to $547.06 on 11/9/12. With current analysts' earnings estimates at $50.14/share for the year ending September 2013 and $58.70/share for the year ending December 2014, Apple boasts a P/E ratio of 10.91 and 9.52 respectively. When taking into account Apple's massive $121 billion in cash and investments (and deducting such figure from Apple's market capitalization), such P/E ratios drop to 8.34 and 7.12 respectively.
Given Apple's forward P/E ratio of 9.52 (7.12 excluding cash), its valuation is extremely attractive. Nevertheless, Apple shares have dropped from a recent closing high of $702.10 on September 19, while such gradual drop has been accompanied by a consistent increase in its short interest. Although Apple's short ratio of about 1.8% is still minimal, it does seem that some Apple skeptics believe that there is a possibility for further downside. It is also possible that recent weakness has also been caused by profit taking as investors may be attempting to avoid having to possibly pay higher capital gains taxes next year.
Whether investors get on the bandwagon in shorting Apple shares or not is a matter of outlook. From our perspective, we expect Apple to continue to generate substantial earnings, above market expectations, and based on its valuation, we actually believe this is a good buying opportunity.
During the last two weeks, there has been a noticeable increase in short interest, and related rise in short ratio (short interest/float) in the technology stocks of Intel, Seagate, Apple, Cisco and Adobe. However, given attractive valuations for such stocks, such increase in short ratio does not necessarily foretell further erosion in share prices, while in the case of Intel and Seagate, elevated short ratio levels may even ultimately trigger a short covering rally in case of unexpected positive news. As such increase in short interest has also accompanies a general decline in the value of such shares, investors who share our opinion may find current valuations quite attractive for buying such shares.