The S&P 500 had an excellent month in November, surging to new all-time highs on the heels of a presidential election victory by Democrat Joe Biden and positive data on multiple vaccine candidates. However, with the health crisis ramping up and no signs of another major stimulus package from Washington anytime soon, some short sellers are betting the stock market is getting a bit ahead of itself.
Instead of betting on stock prices to rise, short sellers take the opposite side of the trade and profit when stock prices fall. Sometimes they bet against companies they believe have troubled business models. Other times they bet against momentum stocks they see as overvalued following large gains.
Rising short interest can be a red flag for investors, but it can also set up a phenomenon known as a short squeeze. Short squeezes are large, short-term spikes in a stock that can occur when short sellers exit their positions all at once by buying shares of stock.
S3 Partners analyst Ihor Dusaniwsky says these five stocks have been getting the most attention from short sellers heading into December:
— Advanced Micro Devices (ticker: AMD)
— Facebook (FB)
— Salesforce.com (CRM)
— Beyond Meat (BYND)
— Amazon.com (AMZN)
Advanced Micro Devices (AMD)
There are likely two factors contributing to the rise in Advanced Micro Devices short interest. Under the leadership of CEO Lisa Su, AMD has become a true competitor in the semiconductor market, gaining market share from both Nvidia Corp. ( NVDA) and Intel Corp. ( INTC) in recent years. But as successful as AMD’s business has been, short sellers are likely a bit skeptical of the stock’s valuation after it has soared more than 3,000% in the past five years. AMD shares now trade more than 47 times forward earnings.
In addition to its steep valuation, short sellers may be betting that a market-wide rotation out of high-growth tech stocks and into value stocks that began in November will continue in the coming months.
Whatever the reason, short sellers added $2.12 billion to their bets against AMD in the past 30 days, according to Dusaniwsky. AMD now has $5.07 billion in total short interest.
Social distancing certainly hasn’t hurt the social media business. Facebook shares are up more than 39% year to date. In the third quarter, the company reported 21.6% revenue growth and 28.6% year-over-year revenue growth. The company also appears to have avoided any major controversy related to its content management leading up to the November election.
Facebook has underperformed in the past month as investors have rotated out of some of the largest tech stocks. In addition, the U.S. Department of Justice officially filed an antitrust lawsuit against Google parent company Alphabet ( GOOG, GOOGL) in late October. Short sellers may be anticipating Facebook could be subject to antitrust action or other regulatory measures in the near future as well. Earlier this year, The Wall Street Journal reported that the Federal Trade Commission was considering an antitrust lawsuit against Facebook.
In the last 30 days, Facebook’s short interest has increased by $1.27 billion, bringing its total short interest up to $7.21 billion.
The biggest recent news related to customer relationship management software giant Salesforce.com is that the company is reportedly in negotiations to buy communication and collaboration software company Slack Technologies ( WORK). Salesforce has a long history of large acquisitions, but a Slack buyout would potentially be its largest, surpassing the company’s $15.3 billion buyout of Tableau in 2019. In fact, the Slack deal could rank among the largest software deals in history.
Cloud services stocks have thrived as more of the economy has transitioned online in 2020, and Salesforce is coming off a quarter in which it reported roughly 29% revenue growth and $2.63 billion in net income. However, the stock initially sold off following the Slack reports, and short sellers may be skeptical of the deal’s likely steep price tag.
Salesforce’s short interest has increased by $1.21 billion in the past 30 days and now stands at $4.21 billion, according to S3.
Beyond Meat (BYND)
Beyond Meat was one of the biggest winners in the first half of 2020. Shoppers stocked up on Beyond Meat products during the lockdowns, but the company’s restaurant sales took a huge hit. While the stock price soared, year-over-year revenue dropped from 141% in the first quarter to 69% in the second quarter to just 2.7% in the third quarter as the initial stockpiling boost subsided. At the same time, Beyond Meat is still struggling to generate consistent profits.
One major catalyst for the stock could be news that Beyond Meat might be the supplier for the new McDonald’s Corp. ( MCD) McPlant menu, which BYND co-created. However, McDonald’s has refused to name a supplier up to this point, and short sellers may be betting the fast-food giant is looking elsewhere for its supply.
Beyond Meat has $1.98 billion in short interest, which represents about 39% of the stock’s total float. Short interest has increased by $945.8 million in the last 30 days.
E-commerce and cloud services are two businesses that have thrived in a difficult 2020, and Amazon is the U.S. leader in both categories. In the third quarter, Amazon reported 37.4% revenue growth, and net income nearly tripled compared with a year ago.
Unfortunately, investors seem to be cashing out of megacap tech stocks and rotating to underperforming value stocks. In addition, the European Commission recently issued a charge sheet against Amazon related to alleged antitrust violations. Short sellers may be betting that Amazon will run into issues with U.S. antitrust regulators in the near future as well.
Dusaniwsky says Amazon has been the most costly short trade of the year so far in 2020, with Amazon short sellers suffering a combined $5.2 billion in year-to-date, mark-to-market losses. However, short sellers appear to be digging in heading into the end of the year, adding $827.6 million to their positions in the past 30 days and bringing Amazon’s total short interest to $9.78 billion.