High Short Interest, Strong Performance Stocks: May 2019

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Includes: AMD, ARRY, BDC, BF.A, CAR, CELG, CFX, COTY, COUP, CVNA, CZR, FSLR, GBT, GILD, HAIN, INSM, IWV, LAD, MDCO, MRTX, NYT, PODD, QQQ, SAM, SHAK, SPY, SRCL, TPX, TREE, TSLA, VOYA, W, YETI
by: BOOX Research
Summary

30 mid- and large-cap stocks with high short interest with the best performance YTD 2019.

The list highlights stocks that despite recent price momentum are favorites of short sellers representing significant skepticism against marker action.

My view on how to use short interest stock screens as a sentiment indicator.

Higher short interest is an odd indicator in the market. On one hand, it's a good indicator of sentiment as a high level generally suggests skepticism of the company's outlook, bringing bears to expect eventually lower share prices. It's also a poor indicator because significant levels of short interest can also be seen as backward looking, as bears short stocks that are already down. With a stock screening tool, I've isolated a particular group of stocks with high short interest and the best performance year to date 2019. The goal here is to better understand why these stocks have bearish sentiment even as the market keeps bidding their share prices higher. The list is a good starting place for further research for stocks that could be subject of an extended short squeeze, with bears eventually forced to cover and close out the positions. I also believe there should be some good short candidates on the list with the thinking that, the bears must be onto something.

I've screened for mid- and large-cap stocks (market cap above $2 billion) in Russell 3000 and NASDAQ 100 with at least 10% of shares outstanding in short interest as a percentage of shares outstanding. The top 30 stocks by performance YTD are presented below.

Short interest Top Performers. Source: ycharts.com data/ table by author

The list is diverse among industries with no defining factor among value versus growth. Indeed, many of the stocks are high growth momentum names like Carvana Co (CVNA) with 12% of shares outstanding reported as short and up 105% YTD but also companies that could be considered in value territory like Avis Budget Group Inc. (CAR) with a forward price to earnings ratio of 7.9x and 10% short interest. Top-line growth among the stocks varies to the extreme between a fintech like The LendingTree Inc. (TREE) that reported quarterly sales up 44.9% y/y and Advanced Micro Devices Inc. (AMD) that posted a (-22%) y/y decline in revenues this past quarter.

What all the stocks share in common is that for whatever reason, the bears are circling but the stock price continues to move higher. A 10% short interest is significant. As a reference, among only S&P 500 stocks included in the screen, the median short interest is 2.2%. Considering stocks not included above, the range of current short interest among S&P 500 stocks is from the lowest, Brown-Forman Corp (BF.A) at 0.3%, to Mattel Inc. (MAT) approaching 20% according to recent data.

Bringing attention to Insmed Inc. (INSM), The Medicines Co. (MDCO), and Mirati Therapeutics Inc. (MRTX) from the list; these three biotechs/drug manufacturers have a significant short-interest but are up massively in 2019. What's curious is that none have yet to bring a product to the market with no material revenues and are trading simply on a pipeline of development. Some investors are confident enough to buy into the growth story now, sending the stock prices higher while the short interest represents significant skepticism among bears. According to the data, MDCO has a short interest of 25% but an even greater 80% of the active float is short. The biotech sector is one of the most exciting areas of the market with a number of companies regularly breaking out with a new product or development that scales immediately and can be hugely profitable. However, for every giant like Celgene Corp. (CELG), as an example, investors should be reminded of the hundreds of failed biotechs that have gone bankrupt. It's an area of the market I tend to avoid as I feel scientific field expertise is often an aspect of the necessary due diligence to gain an edge that I just don't possess.

Other names like burger joint Shake Shack Inc. (SHAK) and premium cooler maker Yeti Holdings Inc. (YETI), with 13% and 11% short interest are each up 85% and 35% YTD respectively and are more accessible as investment and trade ideas. My own opinion for SHAK and YETI specifically is that there is a bit of 'hype' which is likely a reason behind the stock price performance while short interest has increased. In those cases, I'm not ready to take a position at the current level. Full disclosure, I am short Wayfair Inc. (W) via puts and you can read about my bearish case here. Regardless, it will be interesting to see how the on-going battle between the bulls and bears for all the stocks above will play out.

The risk to bears jumping onto a short with a high short interest is that it sets up the fabled "short squeeze" where better than expected results either from a strong earnings report or other positive developments sends the stock ever-higher as the market action forces bears to cover, thereby adding to buying pressure. It's a vicious cycle that may play out over days, weeks, or months depending on the circumstance. Monitoring short interest over time may present indicators for changes in volatility. Bullish investors should want to see short interest trend lower as it represents bears essentially throwing in the towel on a speculative position. To an extent, a decline in short interest for a poor performer may represent that the move lower in the stock has been played out and a bottom could be near. Increasing short interest may indicate higher volatility going forward.

Conclusion

A short interest based stock screen like the one above is a good starting point for research. Active investors should stay up to date on bullish and bearish trends in the market. The contrast between high short-interest/strong performance presents an interesting collection of new stocks to follow. Learning about why the market is bullish about a stock and the accompanying bearish case are important aspects of due diligence.

Disclosure: I am/we are short W. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.