Shorts Are Piling Into These Stocks. Should You Be Worried?
The best thing about the stock market is that you can make money in either direction. Historically, stock indexes tend to trend upward over the long term. But when you look at individual stocks, you'll find plenty that lose money over the long haul. According to hedge fund institution Blackstar Funds, between 1983 and 2006, even with dividends included, 64% of stocks underperformed the Russell 3000, a broad-scope-market index.
A large influx of short-sellers shouldn't be a condemning factor for any company, but it could be a red flag indicating something is off. Let's look at three companies that have seen a rapid increase in the number of shares sold short and see whether traders are blowing smoke or if their worry has some merit.
Short Increase Nov. 29 to Dec. 13
Short Shares as a % of Float
General Growth Properties
For rent, not for sale!
It's been a wild couple of years for mall-based retail-REIT General Growth Properties following the company's bankruptcy declaration during the recession and re-emergence nearly as strong as ever.
Since it re-emerged, activist investor Bill Ackman has tried on numerous occasions to get Simon Property Group to purchase General Growth Properties -- so far unsuccessfully. Part of the reason this plan has failed is that Brookfield Property Partners' ownership of nearly one-third of all outstanding shares of GGP, as well as the improving cash-flow fundamentals of GGP, would suggest it no longer needs a white knight. Ackman has since given up his pursuit of a GGP buyout, but short-sellers certainly haven't given up their pursuit, as evidenced by the 150% increase in short interest during the first-half of the month.
For GGP, part of this negativity could correlate to weak spending in bricks-and-mortar stores, as holiday foot traffic declined 21% the week before Christmas despite just a 3% decline in total sales. As more people turn to the Internet for its convenience, the thought here is that GGP could struggle to maintain its pricing power within its malls.
This theory does hold some water, but it would take nothing short of a severe recession to impact GGP, with its funds from operations improving 22.5% in the third-quarter. Furthermore, same-store net operating income is up nearly 6% for the year as occupancy rates improved despite the second-half of the year being weak from a retailing perspective.
If there is anything that could derail GGP, it's the company's nearly $15.2 billion in net debt, which limits GGP's interim growth options. Still, with U.S. GDP plugging along at better than 4% in the latest quarter, short-sellers look to be playing with fire by betting against GGP.
Peas in a pod
The age-old adage goes that, "two heads are better than one." Following what seems like years of speculation, the world's largest mobile carrier by subscribers, China Mobile, and Apple , with arguably the world's most recognized and popular single phone, the iPhone 5, are joining forces!
The new partnership, which will make the iPhone available to China Mobile subscribers by Jan. 17, has the potential to dramatically increase iPhone sales, pushing the total annual sales in China past the annual sales count in the U.S. within a few years. Beyond that, it reminds Apple investors that this still is a growing company!
Despite the excitement, as Foolish technology contributor and Apple guru Andrew Tonner noted last week, this deal still has some sticking points. The first factor working against Apple's entrance into China is its lack of 4G network availability. Just a handful of cities and Chinese citizens can really enjoy the iPhone, given China's lack of next-generation wireless infrastructure. That technology gap could curtail iPhone sales, at least in the interim.
The other factor Andrew notes is the need for subsidy support from China Mobile. In the U.S., carriers like AT&T and Verizon lock consumers into two-year contracts in exchange for a reduced price on their smartphone. If China Mobile isn't willing to package its plans with consumers in China, then the considerably-more-expensive-than-its-peers iPhone may struggle to sell.
Overall, however, this deal looks like a solid win for China Mobile, in that it should deliver the company a sea of burgeoning middle-class consumers that crave luxuries like a smartphone, while it allows Apple to finally infiltrate the world's fastest growing market. In other words, short-sellers could be barking up the wrong tree here!
Sharing is caring
It's up, it's down; it's up again, it's down again. This pretty much sums up drugmaker AbbVie's past month following the approval of competitor Gilead Sciences' hepatitis C oral therapy, Sovaldi, the release of data from its second of six late-stage studies involving its direct-acting antiviral combo drug, and, finally, the release of additional data from Gilead involving three late-stage studies utilizing Sovaldi. The end result is that I believe we have two potential blockbusters on our hands to treat hepatitis-C and the market doesn't quite realize it yet!
Gilead's Sovaldi has been absolutely incredible, delivering a sustained virologic response (i.e., an undetectable level of HCV) after 12 weeks in the hardest-to-treat genotype 1 patients in 90%-plus of cases. Furthermore, Sovaldi is also the first hepatitis-C treatment approved for genotype 2 and 3 patients that can be given without interferon, which has been known to cause flu-like side effects in patients. More recent trial data, in combination with ledipasvir, demonstrated an SVR above 93% within just eight weeks!
AbbVie's DAA combo has been amazing as well. Given that it doesn't need to be administered in conjunction with interferon and has delivered a 12-week SVR in excess of 90% as well in the hard-to-treat -- yet most common -- genotype 1 patients, I see little reason why it won't have a new drug application on the FDA's desk within the first half of 2014.
Although AbbVie is dealing with the imminent loss of Humira, which accounts for more than half of its revenue at present, by 2017, this DAA combo drug could make up for Humira's loss more quickly than most investors realize. Not to sound like a broken record, but short-sellers probably aren't making the smartest move by betting against AbbVie here.
Here's one stock short-sellers would be smart to avoid
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The article Shorts Are Piling Into These Stocks. Should You Be Worried? originally appeared on Fool.com.Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of, and recommends Apple. It also owns shares of China Mobile and recommends Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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