SABR - The Big Short: 5 Stocks At Risk With High Short Interest

2023-04-12 06:00:00 ET

Summary

• If a stock has a high short interest, it means that there are many investors who have bet against the stock and shorted it.
• The collapse of Silicon Valley Bank and the ensuing domino effect has resulted in short sellers wanting to capitalize on widespread panic.
• After a market pullback and a pending recession, stocks with poor fundamentals are at risk of performing poorly.
• Although heavily shorted meme stocks are still at the forefront of rising short interest, risk-taking investors are willing to profit from others’ misery, betting against stocks with poor fundamentals.
• My five stock picks have short interest above 10% and are rated Strong Sell, given their poor fundamentals based on my quant ratings.

Misery Loves Company: Short Sell Stocks

Misery loves company, and in the wake of the banking crisis and a looming recession, opportunistic investors are cashing in, betting against the fall of companies that may be at risk of financial collapse.

There are several reasons why stocks can experience an increase in short interest. One reason is that investors or traders may take a bearish view of the stock's prospects based on its financial metrics or other company-specific factors and may "short the stock" to profit from expected declines in price. Another reason is that market sentiment and macroeconomic factors can influence short interest. For example, if the overall market is experiencing a downturn, some investors may short, weak stocks in anticipation of further declines. The stocks in this article have a Quant Strong Sell based on a combination of the aforementioned. Because misery loves company, it's important to keep in mind that short selling can be a self-fulfilling prophecy. As more investors short a stock, it can attract attention from other market participants, who may also decide to short it, which may result in a negative feedback loop to drive the stock price down further.

A domino effect has ensued in the wake of the Silicon Valley Bank fall. Investors willing to take a risk and bet against stocks that have gotten crushed could benefit. But market volatility, inflation, and recession fears have investors pondering how best to make extra money. Stocks with poor fundamentals and an increase in short interest further validate the stock's uncertain future. Short interest is the current sentiment of a stock and its position. As I wrote in The Next GameStop :

In a world filled with instant gratification and one of the most unique markets I've seen, we have been surrounded by stocks that outperformed and broke records in 2021, with key winners - if you're willing to roll the dice."

Bearish investors hoping for more company losses on the heels of panic and financial selloff post-Silicon Valley Bank want to capitalize. While short interest above 10% may seem enticing, those with poor fundamentals may pose more risk than investors think, so beware.

There is Risk Associated With Short Selling

Short selling is a speculative strategy, and investors who engage in short selling take on higher risk than those who invest in stocks with good fundamentals. Short sellers aim to profit from the stock's decline, but if the stock price rises, they may experience significant losses, which can create further volatility in the stock's price.

Some stocks with high short interest may also have strong collective fundamentals based on valuation, growth, profitability, momentum, and EPS revisions and are rated Strong Buys. These stocks could experience a short squeeze. In a short squeeze, short sellers scramble to cover their positions by buying shares, which increases the stock price. This can cause a rapid and significant increase in the stock price, which can be detrimental to the short sellers betting against the stock.

5 Stocks to Sell With High Short Interest And Poor Quant Ratings

One man's loss can be another man's gain. The key to short selling is strategically selecting the right stocks with weak collective investment characteristics based on expensive valuation, weak growth, deterring profitability, poor momentum, and declining EPS revisions.

The investor or short seller aims to buy the stock at a lower price after selling at the borrowed premium price. The key is being tactical when investing in stocks with high short interest and knowing when to sell and when to cover (repurchase the shares). The five stocks I'm highlighting were created based on our quant ratings, using a screen that pairs Strong Sell stocks with short interest above 10%.

Each of the stocks possesses poor investment fundamentals. Because short interest tends to be a very poor indicator of stock price predictability and price appreciation, it is imperative to select stocks with high short interest that often have poor investment fundamentals. Investors willing to take on this type of risk want in on this action. The table below displays stocks with a $1B market cap and short interest above 10%. Seeking Alpha's algorithm is updated daily using short-interest data reported by FINRA to ensure that all quant data is near real-time.

Quant-Rated Strong Sell Stocks With Short Interest Greater Than 10% (+$1B market cap)

With a tumultuous first quarter ending March Madness with the markets in turmoil and uncertainty amid the banking and financial crises, traders are betting against companies. Although each of my picks has short interest above 10% based on market sentiment, they are also quant-rated strong sells based on the lackluster momentum, poor growth, and downward analyst revisions. Buyers, beware of the following five stocks.

5 Stocks With High Short Interest

1. Olaplex Holdings Inc. ( OLPX )

• Market Capitalization: $2.71B

• Short Interest (as of 4/11): 13.94%

• Quant Rating: Strong Sell

• Quant Sector Ranking (as of 4/11): 176 out of 189

• Quant Industry Ranking (as of 4/11): 26 out of 28

Haircare company Olaplex Holdings, Inc. has been on a bearish trend. Year-to-date, the stock is -18%; over the last year, it is down more than 70%. After a fourth-quarter revenue miss that resulted in 11 FY1 downward analyst revisions, including a Goldman Sachs downgrade , negative investor sentiment has increased to 13.94% short interest. Adding to the sentiment is a 61-page lawsuit against Olaplex Holdings, citing negative side effects from Olaplex hair products No. 0 to No. 9, which has added to decreases in demand and margin compression to support poor 2023 guidance .

Although the company had a Q4 EPS of $0.07, which beat by $0.01, forward estimated revenue growth is meager at 3%, and forward estimated EPS growth is -6%. The company maintains some strong profitability metrics, as showcased by a 74.84% Gross Profit Margin ((TTM)), solid Cash from Operations, and a 34% Net Income Margin ((TTM)). Despite the good margins, Cash Per Share is only $0.50, which is very low for a recessionary environment. Additionally, Olaplex's premium hair products are seeing a slowdown in demand, likely due to people budgeting amid inflation and higher costs. Additionally, OLPX is experiencing difficulty finding and keeping staff.

Although the stock trades at a discount, as showcased in a forward P/E ratio of 18.74x versus the sector median of 20.55x and EV/EBIT ((FWD)) is a 16% discount to the sector, there are many red flags for this stock through 2023. For one, forward Price/Sales at 4.58X vs. the Sector at 1.11X possesses a quant grade of 'F.' In addition to Olaplex executive team forecasting a "reset" for the year ahead given the challenging market dynamic with increasing competition, SA Author Richard Durant writes , "Olaplex is currently not much more than a one-product company, and the development of a competing chemical bonding treatment could be devastating for shareholders." With Q1 sales expected to fall 41% compared to Q1 of 2022, there's a reason our quant ratings rank this stock a Strong Sell. Let's dive into my next pick with a short interest of more than 18%.

2. BioCryst Pharmaceuticals, Inc. ( BCRX )

• Market Capitalization: $1.61B

• Short Interest (as of 4/11): 18.14%

• Quant Rating: Strong Sell

• Quant Sector Ranking (as of 4/11): 972 out of 1169

• Quant Industry Ranking (as of 4/11): 457 out of 569

Biotechnology company BioCryst Pharmaceuticals, Inc. is focused on improving the well-being of people affected by rare diseases. Q4 EPS of -$0.38 missed by $0.18. For the upcoming quarter, analysts are estimating a loss of $0.28. However, they have been revising their estimates down. In the last 90 days, 9 analysts have revised their estimates down, and only one revised up. The company had strong full-year revenues of $271M, above and beyond their projected $250M. Despite the successful launch of ORLADEYO, which is on track to achieving peak global sales of $1B, shares of BCRX are down more than 25% YTD.

Lack of profitability and a drop in sales for its hereditary angioedema therapy; widening net losses and increases in research and development spending; competition and clinical delays have shifted investor sentiment. Short interest is at 18.14%, and with the "increasing risks associated with Orladeyo's commercialization, I expect a moderate pessimistic market sentiment in the near future (one year) that values the company at around 40% of its blue sky valuation. This would result in an enterprise value of around $1 billion, a decline of approximately 45%, with a corresponding stock price near $4.40," writes Stephen Ayers . Not only is the stock extremely overpriced, given its 'F' valuation grade , but investors evaluating a short interest position should also consider the Strong Sell rating. There are many drawbacks to this stock on the back of poor overall fundamentals. While the negative sentiment may be an opportunity to benefit from its downside, consider the risks.

3. Sabre Corporation ( SABR )

• Market Capitalization: $1.41B

• Short Interest (as of 4/11): 14.03%

• Quant Rating: Strong Sell

• Quant Sector Ranking (as of 4/11): 507 out of 536

• Quant Industry Ranking (as of 4/11): 33 out of 35

With the stock down -28% YTD, one might think this is the Sabre Corporation that bought Dunder Mifflin along with Michael Scott as office manager. However, there is no relation between the two companies. Sabre Corporation is a unique software and tech company helping the hospitality and travel industry operate more efficiently.

Unfortunately, the pandemic stunted operations, and going forward, geopolitical constraints, economic volatility, and inflation will likely continue to present material headwinds. As business travel remains hampered given the remote work environment resorting to video conferencing, the already cyclical travel industry amid economic contraction has led to negative sentiment. SABR has been on a downtrend, with short interest at 14.03%.

With airlines already looking for ways to staff while cutting costs and avoiding disruptions, uncertainty is present. When you factor in Sabre CEO Tom Klein's stepping down , its premium valuation, missed earnings, negative EPS revisions, and decelerating momentum relative to other IT stocks, SABR is at high risk of continued poor performance. Not only is SABR's one-year price performance of -61.83% compared to the sector median -10.91% getting crushed. To make matters worse, Sabre Corporation terminated its distribution agreement with Russian Airline Aeroflot, the largest government-majority-owned carrier, due to their invasion of Ukraine. In a Sabre press release , CEO Sean Menke said:

Sabre has been monitoring the evolving situation in Ukraine with increasing concern. From the beginning, our primary focus has been the safety of our team members in the impacted region, as well as doing our part to support the much-needed relief efforts. We are taking a stand against this military conflict. We are complying and will continue to comply with sanctions imposed against Russia. In addition, today, we announced that Sabre has terminated its distribution agreement with Aeroflot, removing its content from our GDS."

This headwind may serve as a severe headwind to 2023 growth, as Russian sanctions met by new laws will materially impact total 2023 IT revenue growth and reduce fair value estimates.

Sabre is Struggling With Profitability in this Environment

While this may seem enough to warrant the negative short interest, the hint of change in economic and political decision-making can quickly sway investor sentiment to prompt a stock rise. Heed our quant warnings and took note of each stock's fundamentals. Sabre's overall grades are unattractive, as are those of my next two picks.

4. Semtech Corporation ( SMTC )

• Market Capitalization: $1.37B

• Short Interest (as of 4/11): 13.12%

• Quant Rating: Strong Sell

• Quant Sector Ranking (as of 4/11): 553 out of 596

• Quant Industry Ranking (as of 4/11): 68 out of 68

Semtech Corporation suffers from poor bottom-line growth, and analysts have less faith in the company's earnings going forward. Year-over-year revenue growth was a meager 2%, and YoY EPS growth was down 50%. Over the last 90 days, nine analysts have revised their estimates down, and only one revised up. Despite a few fairly discounted valuation metrics, including a trailing Non-GAAP Price to Earnings of 7.71x versus sector 18.33x, and Price/Sales of more than a 35% discount, the all-important forward PEG ratio is only 2.9X, a 75% premium to the semiconductor sector. Many of these poor metrics may be the catalysts for Semtech Corporation's stock price decline.

Many analysts call this stock oversold with momentum below a declining 200-day moving average. Although the Fed's interest rate decisions have prompted the selloff of many stocks, shares of Semtech have seen a rise, especially following the stock's upgrade after analyst Craig Ellis' of investment firm B. Riley's raised rating :

"[There is the] potential for significant further stock upside if non-IoT SMTC carve-outs are executed, which we believe could garner up to $3.0B in better case proceeds for deal debt paydown, EPS-accretive share repurchase, or strategic M&A to further scale up what could eventually be a high growth and high-margin long-range IoT leader."

Although the stock has poor growth and nine downward analyst revisions over the last 90 days, overall profitability is solid. In addition, Semtech has had a tremendous record of top-and-bottom-line earnings beats since 2018, including the latest Q4 2023 , on the back of its Sierra Wireless acquisition. FY2023 has started with a revenue record of $741.5M for Organic Semtech and $756.50M for Sierra Wireless. With goals to diversify geographically and expand margins, as the economic landscape improves and demand increases, the short interest of 13.12% may change. While this stock still has characteristics historically associated with poor future stock performance , investors who prefer stocks rated Strong Buys by our quant ratings with minimal to no short interest may want to consider Top Technology Stocks instead. My final stock with high short interest is another pharmaceutical company.

5. Agios Pharmaceuticals, Inc. ( AGIO )

• Market Capitalization: $1.19B

• Short Interest (as of 4/11): 11.54%

• Quant Rating: Strong Sell

• Quant Sector Ranking (as of 4/11): 993 out of 1169

• Quant Industry Ranking (as of 4/11): 471 out of 569

Agios Pharmaceuticals Inc. offers the best of the worst metrics of my five picks. As showcased in the below Factor Grades, which rate investment characteristics on a sector-relative basis, Agios, a biopharmaceutical company focused on cellular metabolism, has a short interest float of just above 10%.

Agios' lack of growth, as evidenced by its 'F' growth grade, a -20% YTD price performance, and downward earnings revisions, may find these metrics good from a short-interest stance. The stand out of the growth statistics is -169% for forward long-term EPS (3-5-yr) growth. Over the last 90 days, seven analysts have revised their estimates down, and only one revised up. Agios expects to complete enrollment of Phase 3 ENERGIZE studies and enroll more than half of its patients in Phase 3 ACTIVATE-kids this year. Agios hopes to approve PYRUKYND in 2025 to treat sickle cell disease and pediatric PK deficiency if all goes well. While studies of this nature can take years, Agios' R&D organization has made tremendous progress in 2022 to advance its PK activator programs across multiple diseases. During the Q4 Earnings Call, CMO & Head of R&D Sarah Gheuens said :

Overall, I'm very pleased with the significant progress the team made executing across our portfolio in 2022 and look forward to the continued maturation of our five ongoing pivotal studies over the course of 2023."

Although Agios' factor grades and quant ratings may not be perfect, and the macroeconomic outlook is uncertain, short interest is risky as investors increasingly vote to short the stock. Regardless of fear or greed prompting your investment decisions, if you're an investor that prefers to be long stocks, there are less risky options like Top Stocks by Quant to consider. This list ranks companies with the strongest collective scores for value, growth, profitability, rising EPS revisions, and strong momentum.

Should you buy stocks with short interest?

Weak economic data and concern over potential financial crisis breed opportunity. Stocks with poor fundamentals may experience rising short interest due to bearish sentiment from investors, macroeconomic factors, and the self-fulfilling nature of short selling. The stocks that we list as Strong Sells possess many poor characteristics.

Opportunity awaits, but the key is capitalizing on stocks tactically. If you own or are considering short-selling stocks like those mentioned in this article, evaluate and compare their ratings and factor grades, focusing on those with Strong Sell ratings.

As we saw during the Reddit Revolution, just because a stock has significant short interest does not guarantee its fall. Approach cautiously because, as we've seen over the last few years, volatile swings happen at any moment.

If you prefer stocks that benefit from a short squeeze, consider strong buy stocks with short squeeze potential . OLPX, BCRX, SABR, SMTC, and AGIO are stocks that the quant rating system has identified as having unattractive fundamentals and a high level of short interest, a great combination if you are interested in short-selling stocks.

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