In the latest short ratio rankings (short interest / float) for NASDAQ-100 stocks, the stocks with the three highest rankings witnessed a further increase in their short ratio from two weeks ago. It is also interesting to note that Apple, Inc.'s (AAPL) short ratio has reached a recent high of 1.72%, although such level is still rather low, with its rank standing at 69 out of 100 (where a rank of 1 reflects the highest short ratio).
Is this an indication that selling pressure will continue, driving prices lower for shares with high short ratios, or is it time to buy? Some would equate a stock being most shorted as being most hated, with possibility for further downside as investors shun it, while others may argue that such indicators may not be very conclusive due to hedges, options, ETFs and structured products.
Meanwhile, the increase in the short ratio for Apple may actually prove healthy, as it may provide support on market weakness as traders cover their positions. In an article we published on March 2, 2012 "4 stocks heavily impacted by short interest ratio," when Apple's short ratio stood at 1.1% and its rank was 88 out of 100, we illustrated how Apple was prone to experiencing quick down drafts on rumors due to minimal covering by short traders. Although the current short ratio is still minimal, traders are nonetheless shorter by about an additional 5.7 Million shares.
In general, we do believe that stocks with high short ratio are more likely to experience a substantial short squeeze rally on unexpected positive news. That does not mean investors should buy such stocks on a contrarian view basis, but it certainly warrants investigating if such stocks have simply become too oversold, and whether the likelihood of a positive surprise down the road has increased.
Below is a table for the stocks with the 10 highest short ratios for the NASDAQ-100. The top three are Green Mountain Coffee Roasters at 38.51%, Netflix at 30.05% and Research in Motion at 20.41%. The short ratios for such stocks have increased further from their prior levels (two weeks ago) of 35.3%, 28.87% and 18.72% respectively. We have also included Sirius XM Radio data despite being ranked 11, as it used to be ranked 10 two weeks ago.
Top 10 Short Ratios for NASDAQ-100 as of 10/15/2012
|1||GREEN MT COFFEE RSTR||(GMCR)||38.51%|
|3||RESEARCH IN MOTION||(RIMM)||20.41%|
|4||APOLLO GP INC A||(APOL)||16.74%|
|6||VIRGIN MEDIA INC||(VMED)||13.50%|
|8||EXPEDIA, INC. NEW||(EXPE)||9.67%|
|9||SEARS HLDGS CORP||(SHLD)||8.96%|
|11||Sirius XM Radio, Inc.||(SIRI)||8.47%|
Source: data retrieved from complete 100 rankings at SER
The above 10 stocks have an average analysts' opinion of 2.8 out of 5.0, whereby 1.0 is a strong buy and 5.0 is sell. As such average is close to 3.0, it does seem that on average analysts do not recommend buying these shares. Meanwhile, as per table below, the stock prices of 6 out of 10 such companies have dropped anywhere from -11.31% (Microchip Technology) to -63.13 (Apollo) on a year-to-date basis, while the other 4 have increased anywhere between 1.81% (Garmin) to 94.05% (Sears). It is interesting to note that at the end of last year, all such stocks had elevated short ratios between 8% and 21%, with the exception of Staples, which had a short ratio of over 3.4%. We have also included Sirius XM Radio, Inc. , which has also appreciated by 58.79% year-to-date, while at end of last year it had a short ratio of over 9.2%.
Year-to-date stock price change
|GREEN MT COFFEE RSTR||24.23||44.85||-45.98%|
|RESEARCH IN MOTION||7.52||14.5||-48.14%|
|APOLLO GP INC A||19.86||53.87||-63.13%|
|VIRGIN MEDIA INC||32.94||21.28||54.79%|
|EXPEDIA, INC. NEW||52.27||28.81||81.43%|
|SEARS HLDGS CORP||61.67||31.78||94.05%|
|SIRIUS XM RADIO INC.||2.89||1.82||58.79%|
Green Mountain Coffee Roasters
Green Mountain Coffee Roasters shares are currently down -45.98% year-to-date while short ratio stands at 38.51%. Shares have been pressured primarily by competition from Starbucks (SBUX) in the portion packs, in addition to other factors. With analysts' earnings estimates at $2.51 per share for the year ending September 2013, this yields a forward P/E ratio of 9.65. Meanwhile, analysts' earning estimates for Starbucks are $2.13 , yielding a forward P/E ratio of 21.69.
Despite its challenges, given Green Mountain Coffee's forward P/E, which is substantially lower than Starbucks, in addition to its extremely elevated short ratio, its shares can get a boost from a short squeeze driven by any unexpected positive news. As a matter of a fact, such unexpected appreciation may also come to fruition simply if Green Mountain Coffee does not do worse than some existing pessimistic forecasts.
Netflix shares are currently down -13.23% year-to-date while short ratio stands at 30.05%. Again, shares have been pressured by competition in the online DVD arena, in addition to declining margins. A recent short squeeze rally materialized in Netflix shares, with shares increasing by 36.2% from $53.80 on September 25 to $73.22 on October 8, although following the earnings release, shares pulled back to $60.12 as of October 25, 2012 due to margin concerns. With analysts' earnings estimates at $0.85 per share for the year ending December 2013, this yields a forward P/E ratio of 70.73.
Given the elevated forward P/E ratio for Netflix, and despite its high short ratio, it is probably best to avoid buying shares at these levels. As per an article we published on February 22, 2012, "3 scenarios for the Netflix sequel - investors get ready for a 3-d ride", we continue to favor a long straddle strategy, as we continue to expect further volatility in Netflix shares.
Research in Motion
Research in Motion shares are currently down -48.14% year-to-date while short ratio stands at 20.41%. Shares have been pressured by competition from the iPhone, in addition to delays in the launch of BlackBerry 10. Analysts' earnings estimates currently stand at a loss of $-0.54 per share for the year ending February 2014. Despite such outlook, Research in Motion continues to enjoy a solid balance sheet. Cash, short-term and long-term investments currently stand at over $2.1 billion. Meanwhile, it has no debt. At its current share price of $7.52, Research in Motion has a market capitalization of about $3.9 billion.
Given the low market capitalization for Research in Motion relative to its cash holdings and balance sheet, in addition to its short ratio of 20.41, it seems shares may have a limited downside, with the possibility for a short squeeze rally on any unexpected positive news.
Apollo Group, Inc.
Apollo shares are currently down -63.13% year-to-date, while short ratio stands at 16.74%. Shares recently tumbled on October 17, due to a drop of 13.8% in enrollment, as well as the projection of $3.65 billion to $3.80 billion in revenue for the year ending August 2013, versus analysts' estimates of $4.07 billion. With analysts' earnings estimates at $2.74 per share for the year ending August 2013, this yields a forward P/E ratio of 7.24.
Despite a reasonable forward P/E ratio of 7.24, investors need to see a stabilization in enrollments before possibly buying Apollo shares. However, given elevated short ratio of 16.74, any unexpected positive news could lead to a short squeeze rally. Nevertheless, it may be best to forego such opportunity, in order to avoid possibly ending up on the wrong side of the fence whereby Apollo is unable to stabilize enrollments.
Garmin shares are currently up 1.81% year-to-date while short ratio stands at 15.37%. Although at current price level Garmin shares seem to be subdued, they have actually experienced substantial volatility throughout the year, rising as high as $49.33 on May 2, 2012 and dropping as low as $35.84 on July 23, 2012. With analysts' earnings estimates at $2.89 per share for the year ending December 2013, this yields a forward P/E ratio of 13.60.
Despite the possibility of a short squeeze, the current forward P/E ratio in excess of 13 does not necessarily justify purchasing Garmin shares at these levels.
Virgin Media, Inc.
Virgin Media shares are currently up +54.79% year-to-date, while short ratio stands at 13.5%. Virgin Media has benefited from expanding profit margins, as it has appreciated from $21.48 on May 18, 2012, to as high as $34.13 on October 23. With analysts' earnings estimates at GBP154.5 per share for the year ending December 2013, this yields a forward P/E ratio of 13.1 (using stock price of GBP 2,019).
Although momentum is in favor of Virgin Media, given its recent appreciation of 54.79% year-to-date, a short squeeze effect has probably already taken place. Again, despite what seems to be reasonable valuations, and an elevated short ratio, investors may be better served at this junction to remain on the sidelines.
Staples shares are currently down -17.2% year-to-date while short ratio stands at 12.31. With analysts' earnings estimates at $1.42 per share for the year ending January 2014, this yields a forward P/E ratio of 7.90. Staples has a low quick ratio of 0.7 while its free cash flow per share during the past two quarters ending in April and July 2012 have been negligible at $0.03 per share and -$0.03 per share.
Although Staples has a favorable forward P/E ratio, its balance sheet is not as strong as we would like to see. As the outlook for the U.S. economy remains questionable, it is best to avoid Staples shares despite a low P/E ratio and high short ratio.
Expedia shares are currently up 81.43% year-to-date while the short ratio stands at 9.67%. Shares have been boosted by Expedia beating earning estimates during the past three quarters by 9.4%, 73.3% and 25.4% respectively. With analysts' earnings estimates at $3.55 per share for the year ending December 2013, this yields a forward P/E ratio of 14.7.
Given Expedia's year-to-date appreciation of 81.43%, such solid performance has probably already been boosted by a short squeeze. Again, investors may be better served standing on the sidelines as the current forward P/E ratio is not cheap, while any economic slowdown may cause shares to give back some of their gains.
Sears Holdings shares are currently up 94.05% year-to-date while short ratio stands at 8.96%. Sears is expected to lose -$1.57 per share for the year ending January 2013, and -$2.45 per share for the year ending January 2014. Meanwhile, free cashflow per share during the past four quarters have been -$15.11, -$6.67, -$1.31, and -$2.29 per share respectively.
Sears has not been a retail play recently. With a large percentage of its shares concentrated within a few hands, it is not unusual for its share price to defy expectations in a short squeeze led rally. However, given its poor operational performance, it is also too risky to buy its shares in anticipation of further short squeeze given the weak fundamentals of its business, despite the value of its real estate portfolio.
Microchip Technology shares are currently down -11.3% year-to-date while short ratio stands at 8.83%. With analysts' earnings estimates at $1.97 per share for the year ending March 2013, and $2.26 per share for the year ending March 2014, this yields P/E ratios of 16 and 13.94 respectively.
Current valuations for Microchip Technology are actually on the high side, while its short ratio is also elevated. Given recent general weakness in the technology sector, again it is probably best for investors to remain on the sidelines for the time being.
For most of the stocks with the 10 highest short ratios, it seems it may be wiser to refrain from buying them at this time, with the exception of Green Mountain Coffee Roasters and Research in Motion. Meanwhile, it is interesting to note that although Sirius XM Radio did not make the top-10 list, it still has managed to appreciate by 58.79% year-to-date with a relatively high short ratio of 8.46%. Meanwhile, although Apple still has a very modest short ratio, the continuous rise in its short ratio could provide some support (although minimal) in a market sell-off.