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On November 12, 2012, we published the article titled "5 tech stocks with notable rising short interest: time to get on the bandwagon?" We concluded that there was a unique buying opportunity for Intel Corporation (NASDAQ:INTC), Adobe Systems Inc. (NASDAQ:ADBE), Seagate Technology Public Limited Company (NASDAQ:STX), Apple, Inc. (NASDAQ:AAPL) and Cisco Systems Inc. (NASDAQ:CSCO). Since the article's publication, a $100,000 portfolio that would have invested about $20,000 equally in each of such five stocks would be up 34.5%. Meanwhile the S&P 500 index is up 22.8% while the Dow Jones Industrial Average is up 18.6%. Such outperformance by a portfolio comprising the five stocks is realized despite a decline of about 8.4% in Apple shares. Is it time to close out the portfolio and look for a better buying opportunity?

Intel Corporation

Intel's short ratio (shares short interest / number of floating shares) has increased from 4.03% on 11/12/2012 to 4.95% on 10/1/2013. Meanwhile, Intel's stock price has increased by 13.24% on a split and dividend adjusted basis from $20.16 to $22.83. With current analysts' earnings estimates at $1.87/share for the year ending December 2013 and $1.97/share for the year ending December 2014, Intel has a P/E ratio of 12.21 and 11.59 respectively. Such P/E ratios have increased from one year ago, where they stood at 9.86 for the 12 trailing months (year ending December 2012) and 10.56 for the forward 12 months period (year ending December 2013).

Intel has yet to find traction in an environment where consumers continue to transition out of a desktop/laptop environment and onto mobile devices. Intel's earnings for the year ending December 2013, are currently expected to finish the year at $1.87 per share, down by 10 cents from the $1.97 per share level where analysts one year ago were expecting such earnings to actually be for the year 2013. Furthermore, during the past 90 days, analysts have continuously revised down their expectations for earnings for the year 2014 from $2.02 per share to $1.97 per share.

Despite the increase in Intel's short interest to 4.95%, given the appreciation of over 13% in the share price of Intel since November 2012, we believe this is a good level to book profits. Investors may then want to wait until Intel's earnings have started gaining traction again, and whereby earnings estimates have stopped being revised lower. At the same time, given the elevated short ratio of 4.95%, we certainly would not recommend shorting Intel's shares as such a trade would easily be stopped out on any unexpected short squeeze rally.

Adobe Systems Inc.

Adobe's short ratio has decreased from 3.57% on 11/12/2012 to 1.30% on 10/1/2013. Meanwhile, Adobe's stock price has increased by 60.34% on a split and dividend adjusted basis from $32.70 to $52.43. With current analysts' earnings estimates at $1.35/share for the year ending November 2013, and $1.58/share for the year ending November 2014, Adobe has a P/E ratio of 38.84 and 33.18 respectively. Such P/E ratios have increased tremendously from one year ago, where they stood at 14.24 for the 12 trailing months (year ending November 2012) and 13.94 for the forward 12 months period (year ending November 2013).

During the past 90 days, analysts have revised down their expectations for earnings for Adobe for the year 2014 from $1.72 per share to $1.58 per share. Given Adobe's elevated forward P/E ratio of over 33, as well as the substantial drop in its short ratio during the past year, in addition to the downward trend in analysts' earnings revisions and the appreciation of over 60% in its stock price since November 2012, we believe this is a good level to book profits by selling Adobe shares.

Given current valuations, it may also be tempting to short Adobe shares, although investors interested in that strategy may want to limit downside potential by buying out of the money put positions. January 2014 puts are currently trading at about $1.80, providing a breakeven point of about $48.20. Investors may choose not to hold the position to expiration, but to possibly exit in case Adobe shares drop to somewhere between $40 and $45.

Seagate Technology Public Limited Company

Seagate's short ratio has decreased from 9.05% on 11/12/2012, to 4.83% on 10/1/2013. Meanwhile, Seagate's stock price has increased by 64.52% on a split and dividend adjusted basis from $27.17 to $44.70. With current analysts' earnings estimates at $5.31/share for the year ending June 2014, and $5.88/share for the year ending June 2015, Seagate has a P/E ratios of 8.42 and 7.60 respectively. Such P/E ratios have increased from one year ago, where they stood at 5.50 for the 12 trailing months (year ending June 2013) and 5.18 for the forward 12 months period (year ending June 2014).

Seagate's earnings for the year ending June 2014 are currently expected to finish the year at $5.31 per share, down by 30 cents from the $5.61 per share level where analysts one year ago were expecting such earnings to actually be for the year ending June 2014. During the past 90 days, analysts have revised up their expectations for earnings for the year ending June 2015, from $5.83 per share to $5.88 per share.

Despite Seagate's reasonable forward P/E ratio of 7.60, and although its short ratio remains elevated despite its substantial drop during the past year, in addition to the upward trend in analysts' earnings revisions, we believe this is a good level to book profits on Seagate by selling shares. Seagate shares have appreciated substantially since November 2012 by over 64%, and a better buying opportunity may present itself at lower levels. Furthermore, given Seagate's elevated short ratio, as well as its reasonable P/E ratio, we do not believe that investors should short such shares, despite their recent notable appreciation.

Cisco Systems Inc.

Cisco's short ratio has decreased from 1.22% on 11/12/2012 to 1.07% on 10/1/2013. Meanwhile, Cisco's stock price has increased by 42% on a split and dividend adjusted basis from $16.37 to $23.24. With current analysts' earnings estimates at $2.10/share for the year ending July 2014 and $2.25/share for the year ending July 2015, Cisco has a P/E ratio of 11.07 and 10.33 respectively. Such P/E ratios have increased from one year ago, where they stood at 8.67 for the 12 trailing months (year ending July 2013) and 8.09 for the forward 12 months period (year ending July 2014).

Cisco's earnings for the year ending July 2014, are currently expected to finish the year at $2.10 per share, close to the $2.08 per share level where analysts one year ago were expecting such earnings to actually be for the year ending July 2014. During the past 90 days, analysts have maintained relatively stable expectations for earnings for the year ending July 2015, with such expectations dropping slightly by 1 cent from $2.26 per share to $2.25 per share.

Despite Cisco's reasonable forward P/E ratio of 10.33, we believe this is a good level to book profits on Cisco by selling shares. Cisco shares have appreciated substantially since November 2012 by over 42%, and a better buying opportunity may present itself at lower levels. Meanwhile, from a short ratio perspective, such a move from 1.22% to 1.07% is rather insignificant and does not necessarily have any implication either from an absolute perspective nor from a relative perspective. Again, as Cisco's P/E ratios remain reasonable, we would not short such shares at these levels.

Apple, Inc.

Apple's short ratio has increased from 1.8% on 11/12/2012 to 1.97% on 10/1/2013. Meanwhile, Apple's stock price has decreased by 8.42% on a split and dividend adjusted basis from $532.82 to $487.96. With current analysts' earnings estimates at $39.32/share for the year ending September 2013, and $42.95/share for the year ending September 2014, Apple has a P/E ratio of 12.41 and 11.36 respectively. Such P/E ratios are higher from one year-ago levels of 10.91 for the 12 trailing months (year ending September 2012) and 9.51 for the forward 12 months period (year ending December 2013).

Apple's earnings for the year ending September 2013, are currently expected to finish the year at $39.32 per share, down by $10.82 from the $50.14 per share level where analysts one year ago were expecting such earnings to actually be for the year ending September 2013. During the past 90 days, analysts have revised their expectations for earnings for the year ending September 2014, slightly down from $43.59 per share to $42.95 per share.

Given Apple's introduction of its new product cycle, as well as its continued reasonable P/E ratio, its massive cash and investment position, which stood at $146.6 billion as of June 2013, its somewhat elevated short ratio of 1.97%, and the drop its shares prices have sustained since November 2012, we believe in continuing to hold Apple shares at these levels. Meanwhile, although expectations for Apple's earnings have dropped from one year ago, such expectations can potentially underestimate Apple's actual future earnings depending on the success of its new product launch, in addition to its expected expansion in China.

Conclusion

Since November 2012, investors who have built a portfolio comprising the five stocks we examined, have recorded handsome profits of over 34%. As the short ratio for most of the stocks has changed substantially, while four out of five of the stocks have appreciated substantially, investors may choose to book profits and sell Cisco, Adobe, Seagate and Intel. Meanwhile, we believe that Apple continues to offer good value and hence we would maintain a long position. Meanwhile, investors who share our opinion may also choose to establish a short position in Adobe through the purchase of put options in order to limit downside risk potential.

Source: 5 Tech Stocks: If You Bought On Rising Short Interest Should You Hold On?