Even if you don't think you will ever short a stock, it's still worth paying attention to short interest data. Companies with a high percentage of their float short are particularly important to watch, as the elusive "short squeeze" could make-or break-an investor's year. If you don't believe us, just take a look at the 2013 price movements of Tesla (TSLA), SuperValu (SVU) or Questcor Pharmaceuticals (QCOR) to see examples of this phenomenon.
With that being said, there are also quite a few dividend-paying stocks that have exceptionally high levels of short interest. The names vary across sectors, but if you're counting on any of these companies' income streams as a security blanket, you should know what the shorts have been up to. Let's take a look at four names that are on our radar.
Ebix (EBIX) has the fifth highest short interest among all NYSE, NASDAQ and AMEX-traded stocks. A whopping 54.1% of the insurance software development company's shares were short as of mid-September, a 5% increase from the previous filing two-week period. Earnings growth at Ebix is expected to slow, at least according to analysts on Wall Street, but the main reason the company sports such a high level of shorting activity is due to concerns over its accounting.
Bloomberg reported last year that the company's accounting practices were being "probed" by the SEC, and Goldman Sachs (GS)'s decision earlier this year to drop its $780 million bid to buy Ebix didn't exactly endear the stock to investors. Last month, the outlet also reported that federal investigators were reviewing the company for money laundering.
On Seeking Alpha, the anonymous Copperfield Research published a bearish article questioning the company's tax practices one year before the SEC probe. This year, the anonymous Gotham City Research has accused Ebix of improper financing and material errors in more than one of its SEC filings. Ebix responded to the latter a week ago, calling the blog "misleading and inaccurate," adding that it has confidence in its auditing processes.
Down almost 40% year-to-date, Ebix's dividends haven't had an impact on shareholders' portfolios, but it's worth thinking about what investors could gain by buying Ebix right now. For starters, in Copperfield's original analysis in 2011, it stated that Ebix's fair value with the accounting errors was around $9 a share.
At a forward earnings multiple near 6x and a PEG below 0.3 (the sell-side expects 20% annual EPS growth through 2018), Ebix could be considered cheap even with the aforementioned issues factored in. Wall Street's average price target on the stock is $15 a share, but a price in the $12 range is reasonable assuming earnings growth is a bit overstated.
Regardless of what your price target is on Ebix at the moment, the point is that unless you think the federal government will force the company to shut its doors, it wouldn't be a bad idea to consider this name. Almost all of the legal worries are already factored into the stock's price, and even a bit of growth over the next few years would theoretically give shareholders double-digit upside.
And it's not like everyone is staying away from Ebix either; you wouldn't be the ultimate contrarian if you did decide to buy. Of the hedge funds we track at Insider Monkey, Cliff Asness, Matthew Halbower and Robert Emil Zoellner are all managers who established positions last quarter, and D.E. Shaw even holds a relatively large position. It's worth it to track hedge funds, so this data is significant.
With regard to Ebix's historical dividend yield, it is useful to note that the company has skipped its last two quarterly dividend payments. Dividend payments had, however, increased each year since 2011, from $0.04 per share in Q4 2011 to $0.075 in the first quarter of this year, and if the company can put its legal woes behind it, don't discount the possibility of a reinstatement by the end of the year. When it did issue dividends earlier this year, it did so at a meager payout ratio of 5.5%, so under normal business conditions, the income picture is very attractive.
Moving on to a lighter topic, Western Refining (WNR) is another dividend-payer with more than 35% of its float held by short-sellers. Shares of the oil refiner and marketer have subsequently fallen almost 16% in the last six months on the back of a general decline in earnings-second quarter EPS was down over 30% year-over-year-and the evaporating WTI-Brent spread. As the Motley Fool points out, shorts probably dislike this stock because Western is: a) over reliant on "one refinery that accounts for 85% of production," and b) unable to switch refining operations to oil that's cheaper than WTI.
These reasons give sound, economic justification for being short Western Refining, but what if the WTI-Brent spread widens again? According to the U.S. Energy Information Administration, that's exactly what could happen by the end of 2013. After averaging around $3 a barrel in July, the EIA expects the spread to hit $5 in the fourth quarter and close to $7 next year. At only 7 times trailing earnings and a dividend yield of 2.4%, Western Refining gives dividend investors a good, cheap way to play this trend.
The company did not pay dividends during the recession, but it has made payments for seven consecutive quarters and it did give out two special dividends of $1 per share and $1.50 per share in November and December of last year; shares traded in the $25 range at that time. With trailing twelve-month free cash flows hitting $580 million-a tenfold increase from the end of 2010-we don't see any reason to worry about Western's 60% payout ratio at the moment.
Walter Energy (WLT) is another energy stock held by a ton of short sellers-about 34% of its float to be exact. Unlike Western Refining, Walter Energy's woes are tied to the secular declines of the coal industry. As demand for the resource continues to see competition from low-cost domestic natural gas, and the Australian supply boom lingers, it doesn't look like Walter's growth will be kick started in the next few months. Still, Wall Street expects longer-term annual earnings growth of 25% a year through 2018, as Ford Equity Research, in particular, points out that the company's earnings "have shown strong acceleration in quarterly growth rates when adjusting for the volatility of earnings." In other words, it's reasonable to expect a rebound in EPS growth assuming Walter's various cost-cutting measures pay off.
Investors betting against the short-sellers are probably thinking that the company's cost-cutting initiatives can give it a boost, but Walter's gross margins are actually almost 5 percentage points below peers Cloud Peak Energy (CLD) and Peabody Energy (BTU).
From a dividend standpoint, Walter Energy has only interrupted its payments once since 2001, during the height of the recession in 2008. The company had issued $0.125 in dividends per share for thirteen consecutive quarters beginning in May 2010, but its latest payment fell to $0.01 per share, a 92% decrease. With Wall Street's bullish earnings forecast, it is possible that a dividend hike to previous levels is in order, which would represent a 3.5% yield based on current prices.
Carbo Ceramics (CRR) is another dividend stock with over 30% of its float short sold, and surprise, surprise, this is another energy play. Carbo offers income investors decent yield (1.2%) and solid dividend growth, but there are some problems with the company. For starters, as Ted Cooper points out, the company has a lack of revenue diversification, and its two main clients-Schlumberger (SLB) and Halliburton (HAL)-are moving into areas where Carbo's fracking proppant faces more competition, namely outside of the U.S.
Another factor working against Carbo is that its primary product is ceramic proppant. Ceramic proppant is widely known as the most effective material to keep a hydraulic fracture open, but it's much more expensive than its sand- and resin-based counterparts. Overall demand for all types of the material is expected to increase in step with the domestic natural gas expansion, but with only 10% of the overall market, ceramic proppant isn't exactly the frontrunner to be the primary beneficiary from this boom.
Thus, Carbo Ceramics has some secret risk associated with its shares that most investors who don't pay attention to the details miss. Shares trade at a PEG ratio above 3 and nearly 30 times earnings, and it's quite possible that many bears are shorting on the basis of overvaluation here.
As mentioned above, however, Carbo still pays a dividend yield of 1.2% at a reasonable payout ratio of 40%, and free cash flow nearly quadrupled last year. The company hasn't missed a quarterly dividend since 2000, and payments have more than doubled since 2008. Carbo upped its dividend from $0.27 per share to $0.30 per share last quarter, so the income picture is promising, and it looks pretty sustainable moving forward. We think Carbo is the most attractive name of the bunch listed here for that very reason.