As someone who covers a lot of short ideas on this site, one of the most important items I follow is short interest data. One must always be aware of the short interest in a stock. A large short base could spark a short squeeze on good news, while low short interest could spark a huge drop on bad news. Every couple of weeks, we get an update from Nasdaq on short interest data, and I report on what I am seeing. Today, I'm here to discuss the end of March data, and here are five names that have seen some decent short covering recently.
Philip Morris (PM):
Philip Morris saw a surprise short interest drop of more than 20% during the final two weeks of March. More than 2.5 million of the roughly 12.2 million shares short were covered, stopping the recent rise in short interest that you can see in the chart below.
I'm a bit surprised with that recent drop in short interest, especially with the stock rallying higher and higher. I recently told investors to wait for a pullback before buying, and after a quick $3 drop, Philip Morris shares are back up again. It's not that I'm recommending a short position here, but it's never wise to buy at a stock's peak. That seems like an obvious point, but Philip Morris rises and it falls. Those who buy low with this name have been rewarded greatly over the past two years. With more than 1.6 billion shares outstanding, less than 10 million shares short tells you something about this name. With a 3.5% plus dividend and a strong buyback, Philip Morris is not a name many want to short. Recently, those shorts left in a hurry.
After a recent rise in short interest, Apple's short count came down slightly during the final few weeks of March. Apple's short count had been rising the past few updates, and the mid March number was the third highest level for the short count in the past year. I think we'll see a fairly decent size move (say 10% or more) when we get the next update. This is because Apple's upcoming earnings report may contain the most uncertainty we've seen in quite some time. That leads me to believe either a fair amount of shorts will cover before then, or the short count will rise to a new high as investors worry going into the report. The unfortunate part is that NASDAQ releases the data on a bit of a delay, so by the time we get the next round of short data (the mid April update), April will have already reported earnings.
But although we saw the first real decline in Apple's short count in a few months, I brought up Apple here to focus on a different number. Apple's days to cover ratio has risen to a new yearly high, and is up a few hundred percent over the past year. For those that don't know what this ratio is, it's the number of shares short divided by the average trading volume. So for instance, if a stock has 20 million shares short and the average volume is 5 million, the days to cover ratio would be 4.00. That's because it would take 4 full days to cover all the short positions, based on that average trading volume.
Based on the numbers we get from NASDAQ, Apple's average volume numbers have been coming down, and quite substantially. This could be due to a couple of factors. First, overall market volume could be down, and in recent years, it has been at times. Also, it shows that investors are just moving away from Apple. This is a bit surprising as well with Apple coming down, because you would figure a stock at say $425 would trade more shares than a stock at $500 or $700. With a lower share price, you would figure more shares would be traded. That hasn't happened in recent times. So the chart below shows Apple's days to cover ratio according to NASDAQ's info. The days to cover ratio is 1.28, which is fairly low for a single stock. That means that all the shorts could cover their positions in about a day and a third's trading. However, the key here is that Apple's days to cover ratio was 0.31 about a year ago. That's a huge rise, and it goes to the fact that both Apple's short interest is rising, and Apple's volume is decreasing. Those are two numbers to keep watching going forward.
Deckers Outdoor (DECK):
I covered Deckers in the above mentioned earnings season uncertainty article, mentioning that the UGG maker has been off to the races lately. Deckers jumped nicely on Wednesday, after a Piper Jaffray survey found that UGGs are still reasonating with upper income teens. However, while upping their price target and earnings estimates on the name, the firm maintained their Neutral rating on the stock. Also, their price target is $48, about $10 below where we are currently.
Deckers has now doubled from its 52-week low, and that has started to chase away the shorts more extensively as of late, as you can see below. Over 1.8 million shares short were covered in the last two weeks of March, and more than 4.6 million have been covered since the mid December high. According to Deckers 10-K filing, just 34.4 million shares were outstanding as of February 15th. That's due to Deckers' buyback, which has reduced the share count by a few million over the past year or so. With 11.6 million shares short at the end of March, you're still talking about one-third of the outstanding share count being short. That could result in a massive short squeeze on great news, although it is worth noting that this company has issued below expected guidance five straight quarters. That might not happen this time around because the company already "pre-warned" for Q2, but with a stock that's doubled, Deckers still has some things to prove.
First Solar (FSLR):
First Solar saw a huge drop in short interest over the past few weeks of March. The number of shares short declined by more than 1.8 million in the last two weeks of the month, putting short interest in First Solar at its lowest point in more than a year. Since the middle of August high, more than 48.4% of shares short have been covered.
But the short covering may just have started. On Tuesday, First Solar used its analyst day to issue very impressive guidance. The company guided to 2013 revenues of $3.8 to $4 billion and earnings per share of $4 to $4.50, far above a consensus of $3.15 billion and $3.46. This caused a massive spike in the stock, actually halting the stock multiple times due to volatility and circuit breakers. The stock, which closed at $27.04 on Monday, soared to $41 at the day's high before closing at $39.35, a rise of 45.5%. While shares came back down a couple of bucks on Wednesday, they are still up tremendously from where they were just two days ago. With the tremendous guidance issued, it will be interesting to see how many shorts run away when we get the next set of data.
In the last two weeks of March, another million shares short in Netflix were covered. Since the October high of 17.2 million shares short, Netflix bears have run for the exits, with roughly 56.5% of shares short being covered. You can see this below. In fact, so many shorts have covered that Netflix's short count is actually down 18.6% over this time period last year. Everyone knows by now that shorts have run because Netflix had a great Q4 and issued great Q1 guidance.
However, reality may be starting to set in with this stock. Netflix shares took a beating during the first week of April, and are now down more than $30 from their recent high. A third of the post-earnings rally has been wiped out. Netflix will be reporting earnings on April 22nd, so some investors may be starting to set up their bets for the quarterly report. It will be interesting to see if Netflix's short interest comes down again when we get the next update. However, like Apple, the next set of data will come after Netflix has reported.
All five of these names have seen significant drops in short interest, either over the past update or the past few updates. Investors must always be aware of where short interest is in a stock, as it can help determine where a stock may trade in the future. I'll be back in a couple weeks with the next round of data, and we'll see if any of these names make the list again.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.