Short selling is a helpful indicator for the sentiment surrounding a stock. When short selling reaches very high levels, however, investors should pause and ask whether the extreme pessimism is warranted. If it is excessive, there may be a contrarian opportunity.
We screened for tech stocks that are being highly shorted, with short floats above 15% (meaning at least 15% of the share float is currently being shorted). From this universe, we wanted to find those that had strong sources of profitability by using DuPont analysis of return on equity.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.
ROE can be broken up into three components such that changes in ROE can be attributed to those components.
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
Analyzing the sources of returns for a company, we can focus on companies with the following characteristics:
- Decreasing leverage, i.e. decreasing Asset/Equity ratio
- Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)
Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage. The screen produced five stocks, listed below.
We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.
Do you think these companies deserve such high short selling? Use this list as a starting-off point for your own analysis.
List sorted by market cap.
1. Garmin Ltd. (GRMN): Scientific and Technical Instruments Industry. Market cap of $6.22B. Short float at 18.26%. MRQ Net Profit Margin increased from 8.66% to 18.80%, Sales/Assets improved from 0.12 to 0.13, while Assets/Equity decreased from 1.39 to 1.23. It has been a rough couple of days for the stock, losing 5.65% over the last week.
2. Veeco Instruments Inc. (VECO): Semiconductor Equipment and Materials Industry. Market cap of $1.92B. Short float at 24.62%. MRQ Net Profit Margin increased from 19.32% to 20.67%, Sales/Assets improved from 0.2 to 0.22, while Assets/Equity decreased from 1.65 to 1.41. This is a risky stock that is significantly more volatile than the overall market (beta = 2.48). The stock has performed poorly over the last month, losing 18.3%.
3. LDK Solar Co., Ltd. (LDK): Semiconductor Industry. Market cap of $1.07B. Short float at 21.14%. MRQ Net Profit Margin increased from 2.07% to 17.67%, Sales/Assets improved from 0.08 to 0.12, while Assets/Equity decreased from 5.23 to 4.81. This is a risky stock that is significantly more volatile than the overall market (beta = 2.69). The stock has lost 30.13% over the last year.
4. STEC, Inc. (STEC): Data Storage Devices Industry. Market cap of $859.91M. Short float at 32.65%. MRQ Net Profit Margin increased from -13.79% to 14.90%, Sales/Assets improved from 0.13 to 0.25, while Assets/Equity decreased from 1.1 to 1.09. The stock has lost 4.07% over the last year.
5. Alaska Communications Systems Group Inc. (ALSK): Telecom Services Industry. Market cap of $398.85M. Short float at 21.33%. MRQ Net Profit Margin increased from 1.54% to 3.12%, Sales/Assets improved from 0.12 to 0.14, while Assets/Equity decreased from 28.63 to -22.26. The stock has lost 16.38% over the last year.
*Accounting data sourced from Google 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.