Every couple of weeks, the NASDAQ publishes the short interest data for stocks. Bloomberg and The Wall Street Journal pick up the data and publish articles highlighting those stocks with the largest short interest positions in terms of shares and percentage changes. Sirius XM Radio (SIRI) has been at or near the top of the list for quite some time. Should an investor be concerned about this information?
The Wall Street Journal showed Sirius XM holding down the top spot with more than 414 million shares short, nearly 82% higher than runner-up Frontier Communications (FTR) with 227.6 million shares short. Third is Intel Corporation (INTC) with 216 million shares. Do these three stocks have anything in common other than the fact that I own all three?
The table below shows some of the relevant for the top three. (Share figures in millions.)
No. of Shrs.
Other than the absolute number of shares shorted, the three stocks have little in common. Among the 50 stocks with the largest short positions, none of the top three is in the top five in terms of percent of the float or days to cover. Frontier is the only one of these three that makes the top 10 in either of these categories, tied for ninth in terms of the percentage of the float.
Some individual investors with long positions over-react when they see their holdings at or near the top of the list. Some will worry that the so-called smart money knows something that they don't, and become concerned that their shares will decline in value. Others greet the news enthusiastically, looking forward to a potential short squeeze that will drive the price of their holdings higher. Since I am long all three of these stocks with major short positions, I treat the news as wake-up call to look at my positions.
Sirius XM has had a large short activity over the years. This isn't surprising for a number of reasons. Not only did the company have a close brush with bankruptcy four years ago, but it also had a major short position established when it issued a $550 million of 7% Exchangeable Notes (Notes) on the eve of the merger of Sirius and XM that formed the current company. As part of the Note offering, Sirius XM loaned 90% of the shares underlying the Notes to be shorted against those Notes. The loaned shares have since been returned, but there is a widespread belief that a large portion of the nearly 273 million shares underlying the remaining Notes have been shorted against the Notes.
There is another complicating factor with Sirius XM. Liberty Media (LMCA) owns a majority position in the company, and Liberty's holding represents as much as 80% of the market cap of Liberty. Historically, Liberty has spun off its holdings to its shareholders, and many expect that Liberty will do the same with its stake in Sirius XM within the next two years. Some shorts may be expecting a widespread sell-off if those shares are spun off to Liberty shareholders. And there's more with Liberty.
At a recent investor conference, Liberty CEO Greg Maffei discussed the company's investments. During the interview, he noted that Liberty's stock was trading at a discount to the underlying assets, which include the Atlanta Braves and True Position, as well as large strategic stakes in Barnes & Noble (BKS) and Live Nation (LYV), and smaller holdings in a variety of other public and private companies. Investors trying to take advantage of the disparity in values could buy Liberty and short a portion of the underlying shares in Sirius XM, expecting to cover the short position when they receive Sirius XM shares in a spin-off.
And of course, there are those that just think the valuation of Sirius XM is excessive. Clearly, Seeking Alpha contributors Stephen Faulkner and Little Apple, who have written several articles on the Sirius XM short position, disagree. Little Apple articles that include Sirius XM: Short Interest Could Trigger Another Super Squeeze and Breaking: Sirius XM Shorts Continue To Kick The Can express the view that the shorts are wrong. The titles of recent Faulkner articles, Sirius XM: 414 Million Shorts Can Be Wrong, or Sirius XM 406 Million Shorts Are Only Fooling Themselves, or Sirius XM Shorts Exceed 400 Million Bad Ideas, state his position quite clearly.
While I am long Sirius XM, I don't view the large short position as either a large positive or a negative for the stock. There are various reasons to hold short positions in Sirius XM. Not only are the reasons listed above plausible explanations for the short positions, but also the volatility of the price and the current valuation could provide a motivation. I certainly don't think all 400 million shorts are bad ideas, nor do I think they are fooling themselves or wrong. Faulkner wrote the following comment on his most recent article on the errors of those shorting Sirius XM:
so many millions wrong ?? unlikely
13 Mar, 11:29 AMReply! Report AbuseLike0
Are the 7 billion on the other end wrong then?
One set has to be.
13 Mar, 11:37 AMReply
Benjamin Graham stated, "In the short run, the market is a voting machine but in the long run it is a weighing machine." This isn't about the vote being 7 billion in favor and 400 million opposed, so the "ayes" have it correct. This idea is simply not supported by the evidence. There will always be net long positions in stocks, and that certainly doesn't mean that all stocks always go up.
Frontier is a phone company that has struggled to efficiently integrate assets acquired in a Reverse Morris Trust transaction with Verizon Communications (VZ). While upgrading infrastructure to provide broadband access, the company has continued to lose access lines and customers. It has also cut the annual dividend twice since the Verizon transaction. The first time from $1 to $0.75, at the time of merger, and the second time to $0.40 just over a year ago. There is an ongoing debate about whether the current dividend is sustainable and for how long.
At the heart of the debate is whether the integration that was completed last year will result in a reversal of the trend in declining revenue. If it can't, the dividend could be cut once again.
Frontier is often been compared to other phone companies CenturyLink (CTL) and Windstream (WIN). All three serve smaller markets than behemoths AT&T (T) and Verizon, and none of the three have wireless businesses. (Frontier does resell AT&T Wireless service in some of its markets.) All three have also been known for their high dividends, with CenturyLink widely considered the most stable, and Windstream the most vulnerable following the second cut by Frontier. Last month, when CenturyLink slashed its annual dividend from $2.90 to $2.16 and announced a $2 billion share buyback, the shares of both Frontier and Windstream also fell.
Frontier's recent share price of $4.06 results in a nearly 10% dividend. This is a case where the shorts are betting the dividend won't be maintained, and a cut will send the share prices lower, presenting an opportunity to profit. It should also be noted that the high dividend also makes Frontier an expensive stock to short since the shorts are responsible for paying that dividend.
Intel has had short interest above 175 million shares since late summer. It participates in the rapidly changing technology industry, and although Intel is third on the list, it is far from the only technology company making the top 50. It is followed by Blackberry and Microsoft in the top five, and Cisco and Micron are also in the top 10. The top 50 includes other technology heayweights Texas Instruments, Oracle, Seagate and Dell. Rapid technological change and competitive alternatives are key reasons that tech companies are popular with short sellers.
Despite Intel's solid cash position, ongoing share buyback, and a relatively large and growing dividend, it remains a favorite of short sellers. The combination of nearly 5 billion shares outstanding, its competitive positioning, and worries about tablets and cell phones threatening portions of its core business add to Intel's popularity with short sellers.
These three companies have large short positions, mostly because traders are expecting the share price to decline. (The exception would be that portion of the Sirius XM position tied to Liberty valuation or the Notes.) The investor must decide if the short traders are correct, and even if they are, are those issues indicative of a long-term or short-term problem.
As noted above, I am long all three positions. I believe Sirius XM carries a very high multiple, but that it will eventually grow into that value. I believe that Frontier's dividend is safe for the next year and am willing to collect that dividend while waiting to see if management can stem the losses of access lines. With Intel, I am expecting continued volatility in the share price, but looking for the dividend to continue to increase as it has done over the past several years.
Frontier and Intel are part of a broad portfolio of dividend stocks I will be using to supplement my retirement income. The yield has been enhanced and downside risk has been reduced through the use of covered calls. Covered calls are also used to mitigate risk in the Sirius XM position.
Those that have chosen to short these stocks could be making money by taking advantage of short-term declines. I probably have a different investing time horizon, and am not skilled enough to believe that I can accurately time my entry into or out of these positions.
While my investing style may not be suitable for others, it has not been affected by the inclusion of these three stocks at the top of the list of those that have the largest short position.
Additional disclosure: In addition to my long positions, I have covered calls written against my long positions in Sirius, Frontier and Intel. I also trade blocks of Sirius XM on a regular basis.