According to the latest short ratio (short interest / float) rankings for the NASDAQ-100, three stocks recorded massive short interest in excess of 25%: Equinix Inc. (EQIX) ranked number 1 in short ratio (short interest / float) at 28.45%, Green Mountain Coffee Roasters (GMCR) ranked number 2 at 26.52% and Tesla Motors Inc. (TSLA) ranked number 3 at 26.21%. All such 3 stocks are quite controversial, either due to their pricey valuation metrics, in the case of Equinix and Tesla, or due to uncertainty about future competitive trends (Green Mountain Coffee), hence giving plenty of reason for skeptics to establish large short positions. Given such large short ratio (short interest/float), any slightly positive news could cause such shares to spike higher into year end.
Source: Yahoo Finance
Equinix operates International Business Exchange™ (IBX®) data centers in 31 markets across 15 countries in the Americas, EMEA, and Asia-Pacific. Equinix lures its clients by providing reliability, power density, security and recovery while connecting and powering the digital economy. It is estimated that Equinix connects approximately 4,000 companies comprising of cloud and IT service providers, content providers, enterprises, financial companies, network and mobility service providers, carriers, and other bandwidth providers. Equinix's future growth is expected to be sustained due to the ongoing high growth in digital requirements for digital media, social media and cloud applications.
Equinix shares are currently down 18.97% year-to-date from a price of $206.20 on December 31, 2012 to a price of $167.09 on October 11, 2013. Shares peaked at a price of $231.56 on May 15, 2013. Equinix earnings for the quarter ending June 2013 were a loss of $0.58 vs. average market estimates for a gain of $0.70. However, excluding debt extinguishment, restructuring gains, acquisition costs, and including stock-based compensation expense, Equinix's earnings would have been $1.27 per share. Meanwhile, revenues came in at $525.7 million vs. average market estimates of $533.34 million, affected by an accounting estimate change related to non-recurring installation fees which reduced revenue by $5.8 million.
Equinix currently has a market capitalization of $8.26 billion. With average analysts' earnings estimates of $1.51 per share for the year ending December 2013 and $3.91 for the year ending December 2014, Equinix boasts price/earning ratios of 110.66 and 42.73 respectively. Meanwhile, during the past 90 days, analysts have reduced their earnings estimates for Equinix from $4.59 per share for the year ending December 2014 to $3.91 per share. Although such ratios are elevated, Equinix has a price/book ratio of 3.6 vs. industry average of 4.7, a price/sales ratio (TTM) of 4.2 vs. industry average of 6.6 and 3-year average revenue growth of 29 vs. industry average of 27.4.
Given Equinix's elevated short ratio (short interest/float) of 28.45%, we believe Equinix can spike higher despite its elevated price/earning ratio. Its other valuation ratios are quite reasonable, while the charge of $1.90 per share that it incurred during the second quarter of 2013 for debt extinguishment is a positive factor for the long term. Meanwhile its revenue miss was not as severe as the headline news for the second quarter of 2013 due to the accounting change Equinix adopted. Equinix stands well positioned to benefit from its core business driven by growth related to digital media, social media and cloud applications.
One of the largest fund holder of Equinix shares include Goldman Sachs Growth Opportunities Fund (GITAX) (estimated to hold about 1.35% of outstanding shares as of July 31, 2013). We find GITAX to be quite attractive. It currently has about 4.85% of its assets invested in Equinix. Its other top 4 holdings include Apple, Inc. (AAPL), representing 10.25% of the fund's assets, Qualcomm (QCOM), representing 6.4% of the fund's assets Google (GOOG), representing 5.97% of the fund's assets and Amazon (AMZN), representing 4.16% of the fund's assets.
GITAX is currently up about 16.6% year-to-date from December 31, 2012 to October 11, 2013. Yet, its performance is dragged down by its largest holding, Apple (down 5.6% year-to-date), as well as Equinix (down 18.97%). We believe the fund can get a substantial boost in its performance driven by its two current laggards, Equinix as well as Apple, both of which we believe can appreciate substantially.
In the article we published on October 11, 2013, "Apple tastes better by the slice", we concluded that at Apple is severely underpriced, as its current adjusted price/earning ratio of 7.74 for the year ending September 2014 is substantially below its potential value. We discussed how Apple's price/earning ratio could be no less than about 14 if Apple was sliced and valued as a series of independently listed companies such as Apple iPhone Inc., Apple Computers Inc., Apple iPod Inc., Apple New Business Initiatives Inc., Apple Retail Inc., Apple iTunes Inc., etc. ...
Furthermore, in another article we published on October 7, 2013, "Apple at $800: flight delay or cancellation?", we also concluded that Apple's current stock price pull back is temporary in nature, as we expect Apple to yet reach a target price of $800 per share due to its cash generating capability, its dividend yield of about 2.5%, its existing dividend and share buyback program of $100 billion (while being lobbied to increase its share buyback to as much as a $150 billion program), the encouraging prospects for iPhone 5c and 5S and its migration to an across the board advanced 64 bit A7 chip technology.
Investors who share our positive outlook for Equinix and Apple and possibly benefit by buying Goldman Sachs Technology Tollkeeper fund, whereby Apple and Equinix currently make up over 15% of the fund's assets, while both such stocks have been underperforming and can potentially appreciate substantially in the months ahead. Alternatively, investors can also simply buy Equinix and Apple shares outright.
Green Mountain Coffee Roasters
Source: Yahoo Finance
Green Mountain Coffee specializes in the coffeemaker and specialty coffee business. Its shares are currently up 65.1% year-to-date from a price of $41.34 on December 31, 2012 to a price of $68.26 on October 11, 2013. This year, shares peaked at a price of $89.66 on an intraday basis on August 29, 2013. Green Mountain Coffee earnings for the quarter ending June 2013 were a profit of $0.82 vs. average market estimates for a profit of $0.77.
Green Mountain Coffee currently has a market capitalization of $10.27 billion. With average analysts' earnings estimates of $3.26 per share for the year ending September 2013 and $3.80 for the year ending September 2014, Green Mountain Coffee boasts price/earning ratios of 20.94 and 17.96 respectively. Meanwhile, during the past 90 days, analysts have increased their earnings estimates for Green Mountain Coffee from $3.62 per share for the year ending September 2014 to $3.80 per share. Green Mountain Coffee has achieved a 3-year average revenue growth of about 70% vs. industry average of about 7.3%.
Despite Green Mountain Coffee high price/earning ratio and its substantial stock price appreciation year-to-date, its above industry revenue growth as well as its very high short interest ratio of 26.52% (short interest/float) could act as catalysts for shares to jump yet higher on positive news. Its above forecast performance during the quarter ending June 2013 was driven by strong sales in its single serve k-cups as well as lower coffee prices. Analysts have been cautious about Green Mountain Coffee due to the expiration of k-cups related patents last year. Some have anticipated such patent expiration will cause serious headwind for Green Mountain Coffee, as competitive products enter the market. That has fueled a rise in the stock's short ratio (short interest/float).
As we do not believe that patent related growth deceleration will be as pronounced as some analysts are expecting, and given Green Mountain Coffee elevated short ratio as well as its substantial average growth rate during the past 3 years, we believe current levels offer a good price to buy shares, possibly aiming to retest this year's high price of August 29. Investors who share our perspective can either buy shares outright at these levels, or possibly purchase call options expiring in January 2014 for a premium of about $7.93, offering a break-even level of $77.93 to the upside, and a maximum downside risk equivalent to the premium paid.
Tesla Motors Inc.
Source: Yahoo Finance
In a recent article we published on October 7, 2013 "How to profit from Tesla, Amazon and Netflix stock exuberance", we concluded that despite Tesla's substantial price appreciation year-to-date, which stood at 434% at that time, Tesla shares could move yet higher, while they could also be subject to downside volatility. Hence we suggested an option strategy for buying 150 puts as well as 180 calls. Within a few days of our article, Tesla shares dropped to an intraday low of $161.50 from about $181, and bounced back to close at $178.70 as of October 11, 2013.
Most of Tesla's metrics that we discussed in our article of October 7 still hold. Meanwhile, Tesla's short ratio (short interest/float) of about 26.21% is quite substantial and could act as catalyst for Tesla shares yet to move substantially higher by year's end on positive news. Such news could consist of continued adoption of Tesla's electric vehicles by the public. In such case, Tesla'a forward price/earning ratio of almost 98 could seem reasonable if it is perceived that Tesla will achieve accelerated revenue growth in the years ahead.
Tesla currently has a 3-year average revenue growth rate of about 50.6% vs. an industry average of about 18.3%, while its share of the automobile market remains at its infancy. It is estimated that Tesla may have as much as 8.4% market share of the U.S. luxury auto market, but Tesla's market share of the entire auto market is quite negligible and can change in the years ahead as Tesla's technology enables it to enter lower priced market sectors.
In either case, we still believe that Tesla shares can spike higher, or in the case of unforeseen negative news, such shares could also drop substantially due to elevated valuations. We would still look to benefit from a stock price spike higher, driven by its excessive short ratio (short interest/float) by being long calls, while remaining hedged through the purchase of out-of-the-money puts.
Shares of Equinix, Green Mountain Coffee and Tesla can spike higher going into the end of the year due to their excessive short ratio (short interest/float). In the case of Equinix, we would recommend buying Goldman Sachs Technology Tollkeeper fund, as such fund is also long Apple, Inc., and is currently weighed down by Equinix's and Apple's underperformance year-to-date. Alternatively, we would also recommend buying Equinix shares on an outright basis. We would also recommend buying shares, or calls, of Green Mountain Coffee Roasters as shares can spike to higher level due to elevated short ratio, as well as our expectation for patent expiration issue to be less pronounced than anticipated. In the case of Tesla Motors Inc., despite a year-to-date appreciation of over 400%, share prices can still spike higher driven by high short ratio, as well as continued above average revenue growth. However, due to its elevated current valuation, we would prefer to hedge a long position in Tesla by also buying out-of-the-money puts.