Short interest, a measure of investors’ pessimism for a particular company, is an interesting gauge to consider.
A stock that is heavily shorted may indicate a company to outright avoid or, in contrast, an unloved company that is suffering from overwrought pessimism and is cheap, as a result.
Here are five U.S. stocks that investors are betting will fall. They are ordered by percentage of float shorted, from plenty to most.
Its stock has fallen 28% in the past 12 months as new home sales and construction metrics have skipped along a cyclical trough.
Hovnanian swung to a fiscal first-quarter loss of $64 million, or 82 cents a share, from a year-earlier profit of $236 million, or $2.97. Revenue fell 21%.
The gross margin contracted from 16% to 13% and the operating margin fell from negative 3.7% to negative 9.5%. Hovnanian is running a shareholders’ deficit of $402 million. It has $426 million of cash on hand and $1.7 billion of debt.
Of researchers following the company, none rank its stock “buy”, five rank it “hold” and seven rank it “sell.” Currently, 30% of Hovnanian’s float is sold short, indicating heightened pessimism among equity market participants.
4. Avanir(AVNR_) develops therapeutic products for the treatment of central nervous system disorders. Its stock has advanced 61% in 12 months and delivered annualized gains of 57% since 2008. Avanir’s Abreva, a cold sore treatment, is the only cream approved for over-the-counter sales by the FDA. Its other approved product, NUEDEXTA, is used to treat pseudobulbar effect, a neurological disorder. AVP-923, a medication to treat the same disorder, is currently in the clinical stage of development. Avanir receives “buy” ratings from all three of the researchers evaluating its stock.
Avanir’s fiscal first-quarter loss widened to $12 million, or 11 cents a share, from a year-earlier loss of $4.8 million, or six cents. Revenue increased 22% to $1.8 million. Avanir has $118 million of cash and no debt. It has diluted shareholders, though. The float increased 47% to 122 million shares in the latest quarter. Investors have sold short 31% of Avanir’s stock, betting on a future decline. The stock sells for an expensive 4.4-times book value and 120-times sales.
3. RPC(RES_) is an oil and gas services company, providing technical assistance and equipment, ranging from pressure pumping to drill pipe. Its stock has appreciated 38% already in 2011, outpacing indices and peer investments. RPC swung to a fourth-quarter profit of $55 million, or 38 cents a share, from a loss of $5.2 million, or three cents, a year earlier. Revenue more than doubled to $328 million as demand for fossil fuels accelerated, an ongoing trend.
RPC’s quarterly gross margin widened from 33% to 47% and its operating margin climbed from negative 4.4% to positive 27%. RPC has $9 million of cash and $121 million of debt, for a quick ratio of 2.7 and a debt-to-equity ratio of 0.2. RPC sells for a forward earnings multiple of 14, a 34% industry discount. And, 70% of researchers covering the stock rank it “buy.” Yet, 33% of RPC’s float is sold short, perhaps by investors expecting a drop in crude oil’s price.
2. St. Joe(JOE_) is a real estate development company based in Florida. Joe’s largest shareholder is Fairholme Capital, run by famed value investor Bruce Berkowitz, who owns 28% of shares outstanding. But, David Einhorn, another closely followed value disciple, has recommended St. Joe as a short and suggested that management is improperly failing to write down its property values and is thus engaging in misleading accounting practices.
St. Joe’s fourth-quarter loss decreased 95% to $2.7 million, or three cents a share, as revenue stagnated at $37 million. St. Joe’s gross margin rose from negative territory to 27%. The operating margin remained in shallow negative territory. St. Joe has $209 million of cash and $55 million of debt, for $155 million of net cash and a debt-to-equity ratio of 0.1. An outsized 35% of St. Joe’s stock is sold short. It receives “buy” ratings from 25% of analysts.
1. McClatchy(MNI_) is a newspaper publisher, which owns The Miami Herald, Charlotte Observer and other papers. Its stock has tumbled 33% in 12 months and delivered annualized losses of 31% over a three-year span. Fourth-quarter net income decreased 42% to $15 million and earnings per share fell 53% to 18 cents, hurt by a higher share count. McClatchy’s gross margin narrowed from 60% to 57% and its operating margin dropped from 27% to 24%, hurting profit.
McClatchy has just $18 million of cash and $1.7 billion of debt, for a quick ratio of 0.8 and an excessive debt-to-equity ratio of 7.8. McClatchy’s stock has a beta value, a measure of market correlation, of 3.1, so it tends to more than triple the day-to-day movements of the equity market.
Of analysts covering the company, all five rank its stock “hold.” It receives no “buy” or “sell” rankings. Currently, a disproportionate 42% of the float is sold short, indicating sizable negativity.