To create the list below we began by screening the basic material sector for evidence of increased short positions.
Short sellers benefit when share prices fall. Their collectively increased short positions on a stock indicates a belief that there is more downside than upside to price in. For this list, we screened for increased shorting month over month representing at least 2% of share float.
We then looked for possible fundamental catalysts, which might have lead to the negative sentiment.
First we screened our list for less than encouraging trends in returns, including: Return on Assets (ROA), the result of dividing a company's annual earnings by its total assets, Return on Equity (ROE), the total net income returned as a percentage of shareholders equity, and Return on Interest (ROI), a measure of profitability that is calculated by dividing net profits by total assets.
Next we searched for stocks with weak trends in Earnings Per Share (EPS) over the last year and the last five years.
We were left with 2 companies on our list.
However, investors should note that both stocks are rallying above their 20, 50 and 200 day moving averages (MA). This is a bullish technical indicator that suggests the stock is running strong, and may have more upward momentum to price in. Additionally the EPS trends for both companies look stronger going forward.
For an interactive version of this chart, click on the image below. Average analyst ratings sourced from Zacks Investment Research.
Do you agree with short sellers that these companies exhibit more downside? Or do you expect them to rebound in the near future? Use the list below as a starting point for your own analysis:
1. Approach Resources, Inc. (NASDAQ:AREX): Engages in the acquisition, exploration, development, and production of oil and gas properties in the United States.
- Market cap at $1.03B, most recent closing price at $26.50
- EPS: 0.20
- EPS this year: -26.63%
- EPS next year: 110.26%
- EPS past 5 years: -5.53%
- EPS next 5 years: 20.00%
- ROA: 0.55%
- ROE: 0.78%
- ROI: 0.59%
- 20-day MA: 7.32%
- 50-day MA: 8.54%
- 200-day MA: 3.26%
Short Sellers: Shares shorted have increased from 6.24M to 7.58M over the last month, an increase which represents about 3.72% of the company's float of 35.98M shares. Days to cover ratio at 10.96 days.
Short sellers see more downside to this stock compared to its industry peers. Consider, AREX short float stands at 21.18%. This is much higher than Cenovus Energy Inc. (short float at 0.49%, representing 3.47 days of trading volume), Suncor Energy Inc. (short float at 0.41%, representing 1.28 days of trading volume) and industry giant Petroleo Brasileiro (short float at 0.57%, representing 1.32 days of trading volume).
However, AREX short float is more in line with similar sized competitors such as BBG (short float at 27.89%, representing 8.2 days of trading volume) and Quicksilver Resources Inc., (NYSE:KWK) (short float at 18.66%, representing 5.53 days of trading volume).
EPS Growth: AREX earnings growth looks weak, with EPS growing by -26.63% over the last year. This is far worse than APC (EPS growth over the last year at 188.98%), but still outperforms BBG (EPS growth over the last year at -98.11%%) and KWK (EPS growth over the last year at -2739.41%).
Momentum: AREX has recorded great gains over the last month compared to its closest competitors. The stock returned 16.89% since 4/19/13, better than Anadarko Petroleum Corporation (NYSE:APC) and Bill Barrett Corp. (NYSE:BBG), which returned 12.55% and 13.90% during the same holding period.
Earning News: AREX reported earnings for Q1 2013 on 5/3/2013, emphasizing a 15% increase in production and a 19% increase in revenue, as reported by The New York Times.
2. Horsehead Holding Corp. (ZINC): Produces and sells specialty zinc and zinc-based products in North America.
- Market cap at $502.74M, most recent closing price at $11.40
- EPS: -0.44
- EPS this year: -242.86%
- EPS next year: 500.00%
- EPS past 5 years: -35.90%
- EPS next 5 years: 15.00%
- ROA: -2.64%
- ROE: -4.86%
- 20-day MA: 7.45%
- 50-day MA: 8.80%
- 200-day MA: 17.66%
Short Sellers: Shares shorted have increased from 3.51M to 4.63M over the last month, an increase which represents about 2.56% of the company's float of 43.71M shares. Days to cover ratio at 14.81 days.
Short sellers think there's more downside to the stock, especially when comparing short float to industry averages. ZINC short float stands at 10.56%, which is equivalent to 14.81 days of average trading volume. As an example, this is much higher than MTRN (short float at 3.74%, representing 9.12 days of trading volume) and BHP (short float at 0.57%, representing 5.78 days of trading volume).
EPS Growth: The company's earnings growth looks weak, with EPS growing by -242.86% over the last year. This is considerably worse than titans in the field like BHP Billiton Ltd. (NYSE:BHP) (EPS growth over the last year at -32.44%) as well as its close competitors Materion Corporation (NYSE:MTRN) (EPS growth over the last year at -38.08%) and Teck Resources Ltd. (NYSE:TCK) (EPS growth over the last year at -69.31%).
Momentum: ZINC returned 16.21% since 4/19/13, beating out TCK and MTRN, which returned 10.88% and 10.65%, respectively, over the same time period. ZINC also surpassed industry giant BHP, which returned 5.41% during the sameperiod.
Earning News: ZINC disclosed earnings for Q1 2013 on 5/6/2013, reporting revenue of $118.26M, 6.19% above the same quarter in 2012, according to Wall St. Cheat Sheet.
*EPS and short data sourced from Yahoo! Finance, all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Business relationship disclosure: Kapitall is a team of analysts. This article was written by Emily Smykal, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.