This is a guest post by Karl Loomes, market analyst at Astec Analytics, part of SunGard. The views expressed are those of the author.
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It has been an interesting and busy year for short sellers in 2013, with climbing stock markets offering opportunities for those making the right bets against the momentum. With growing concerns over Federal Reserve tapering of its asset purchases, a number of companies stood out as high-profile shorts that either punished or rewarded the traders betting on declines.
(The list below was compiled with an eye on borrowed volumes, borrowing costs, utilisation, and which stories drew the most public interest.)
Tesla Motors (TSLA)
The electric vehicle maker posted its first-ever quarterly profit in Q1, as well as fairly buoyant sales data in the early half of the year. This was tempered however, by a less positive reaction to more recent sales figures and a PR blow from reports of a few of Tesla’s Model S sedans catching fire. It didn’t help when George Clooney added his two cents, saying his Tesla (a previous model) was always breaking down so he decided to get rid of it.
From a short selling perspective, as analysed by its proxy of securities lending information, the story was no less mixed. Early in the year while the company’s share price stagnated, short sellers built up their bets against the company only to be ‘proven wrong’ by its Q1 results. Following this, these positions were quickly closed and as the company’s share price climbed – peaking at almost three times its May level in October – short positions held fairly muted. That is at least, until November, as this latest batch of concerns surrounding the company has led its stock to pull back, while short sellers are moving back into the market once again; the number of TSLA shares being borrowed having doubled since the start of November, back to the year’s highest level.
The former Research In Motion took hit after hit in 2013 as its share of the ever-more-competitive smartphone market continued to decline. Despite hopes that its Blackberry 10 handsets would offer a turnaround for its prospects, disappointing sales figures and staff reductions pressured its share price, as it emerged its latest handset would not prove to be a saving grace. In the latest flurry of activity, speculation that the company may be bought out petered to nothing as a bid by a Fairfax-led consortium passed its deadline.
On the short side, it would seem that as the company’s share price benefited from some rare optimism in the early months of the year; short sellers were predicating its downfall as borrowing volumes climbed to a high of over 130 million shares being borrowed. Uncertainty then dominated for a month or so, as a share price treading water was met by the covering of open short positions. As the stock plummeted in the latter half of the year however, short positions have also been on the decline – likely through a deemed lack of potential profits rather than optimism of a renewed price surge. Speculation over the Fairfax bid did see volumes surge in November however, only to fade to previous levels once it proved a moot point.
3D Systems (DDD)
In many ways DDD’s interest in 2013 was very much linked to the prospects, or at least perceived prospects, of the fledgling 3D printing industry as a whole. While the markets have been wondering how successful this new technology will become, DDD has seen its share price gain pace since April, able to undergo a $250 million stock offering with its stock price hardly suffering. As new software was developed, and global retailers began to offer 3D printing supplies, DDD’s strength grew.
That said, data from Astec shows that short sellers have remained pessimistic about this idea. In the first months of the year the number of the company’s shares borrowed climbed rapidly as the share price rose. That increase was later partially retraced, but in only a muted decline compared to the overall gains in the stock since April. As this first stock surge receded however, borrowing volumes held near their highs, where they have remained with only minor fluctuations around the time of the secondary offering.
It has been a volatile year for InterOil, as company and market news pressured its shares. In May, the stock swung wildly on the day news emerged that it entered exclusive negotiations with Exxon Mobil’s Papua New Guinea arm, to develop fields in the country. More recently, this month, the stock gapped lower when the deal was actually confirmed.
On the short-selling side, there have been peaks and troughs in the borrowing of IOC shares. The number being borrowed has fallen almost 30% from earlier in the year though, and the short side seems to see the fallen shares as offering fair value, or at least little opportunity to profit, rather than an upbeat view on the company.
Molycorp’s prospects have been very much tied to the rare earth elements market and in turn economic growth in China. With rumours of a takeover bid and a $300 million capital raising, all in the first months of 2013, its share price had lost 50% of its value by March.
Astec data meanwhile suggests short selling, despite a lack of any major gains in its stock price, has been rising all year. Since January, the number of Molycorp shares being borrowed has more than doubled, hinting at the idea short sellers remain sceptical of its price.
Opko Health (OPK)
Opko Health has generally been a gainer in 2013, particularly in the second half of the year as a number of insider purchases by the CEO and board members helped support the stock. Short positions have been building as the share price climbed though, seeming to suggest those inclined to bet against the stock have been unconvinced by its advance.
Arena Pharmaceuticals (ARNA)
Much of the news for Arena this year has focused on its anti-obesity drug Belviq, with the pharmaceutical company’s fate tied to the flagship drug. Shares have been sliding since January, down almost 40% for the year even with a recent respite on the back of earnings. The short story has been somewhat mixed, with a number of surges in borrowing of ARNA shares during the year.
JC Penney (JCP)
Starting the year off on the wrong foot with soft earnings data, JC Penney has seen its shares take hit after hit in 2013, notably with the unusual back and forth with Bill Ackman in August, after the hedge fund manager published a five-page letter berating fellow directors before ultimately leaving the board and selling his stake.
The securities lending data suggests a game of two halves – the first quarter generally seeing short sellers covering their positions, before a fresh wave of betting against the stock turned up starting in July. During the last six months of the year, JCP saw the number of it shares being borrowed, the proxy for short selling, more than double to around 77 million shares.
Another subject of a Bill Ackman media campaign, Herbalife saw most of its headlines and interest take place after the hedge fund manager underwent a public campaign describing the company as a “pyramid scheme” and a house of cards in December 2012. Hedge fund rivals lined up against Ackman though, including Carl Icahn, and shares of Herbalife have surged, recently hitting fresh record highs.
This pattern of positivity was effectively mirrored on the short side, with the number of HLF shares being borrowed, although holding at elevated levels in the early half of the year, from May the volume of borrowed stock has now halved.
Sears Holdings (SHLD)
A year of mixed signals for the retailer: weak earnings numbers in the first half year were book-ended by stronger numbers towards the end. The good results helped push the share price higher, before fresh concerns about the company sales figures and its need to raise cash hit the stock hard.
The price rise in the second half appears to have brought increased short interest, with borrowing volumes almost doubling between May and July. Although perhaps tellingly the latest retracement of the stock has not been met by a significant decline in borrowed volumes, suggesting those on the short side remain pessimistic.
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