With the S&P500 With the stock up more than 23% this year, some investors are paying attention to individual names in the broader benchmark index that look overvalued and may be at risk of correction. These select investors hope to execute a short sale that can help them access outsized profits.
Shorting is a standard practice commonly employed on Wall Street when investors or companies borrow shares at a certain price and then immediately sell the borrowed shares into the market. These investors hope that the stock price will fall so that they can buy back the shares for less and then return them to the borrower, pocketing the price difference as a profit for themselves. For some, shorting is seen as a common practice. Others see it as a healthy part of a free market, keeping valuations from becoming too frothy.
Shorting can be risky if not hedged properly. Stocks can theoretically rise indefinitely, so investors who bet wrong could lose their shirts if the stock price continues to rise. Retail investors monitoring their portfolios should take note if one of their stocks has a large short position against it. If you see someone, it could indicate that they are re-examining their position on the stock and double-checking that they are not missing anything.
Here are the five most shorted stocks in the S&P 500. Most are on this list for a reason, but the bears are wrong about one of them.
1. Super Micro Computer – 21.25% of the shares have been sold short
Super microcomputer (NASDAQ: SMCI)the designer and manufacturer of computer servers and storage systems, has sold short just over 21% of its available shares – the highest in the S&P 500, according to StatMuse. Like most major stocks this year, Super Micro has benefited enormously from the artificial intelligence boom. Companies that use machine learning and other types of AI models use Super Micro’s computers and storage systems to store the massive amounts of data needed to make AI possible. The share price is up 66% this year.
However, a company with a reputation for shorting stocks, Hindenburg Research, issued a brief against Supermicro in August, alleging accounting irregularities that Supermicro says are false or inaccurate. The Securities and Exchange Commission already charged the company in 2018 with “widespread accounting violations.” Super Micro saw its valuation rise to almost 93 times earnings earlier this year, but now trades at around 24 times earnings.
2. Day Force – 15.69% short sold
Nearly 16% of the shares are sold short on the cloud-based HR platform Day power (NYSE: DAG). The stock is down more than 4% this year. Day Force is a software-as-a-service company that helps companies manage all aspects of human resources, from payroll to benefits and hiring. The company trades at a lofty valuation of more than 210 times earnings and 35 times forward earnings, well above its peers.
Based on future earnings, the company is much more in line with its peers, but still at the top of the group. Given the amount of competition in this space, investors are likely wary of Day Force’s valuation, even if the company is doing good things.
3. International paper — 15.58%
Paper manufacturer International paper (NYSE:IP) has sold short more than 15.5% of publicly available shares. The stock is up almost 30% in 2024, beating the broader market this year. International Paper has been involved in takeover rumors all year, most recently involving the Brazilian paper company Susano. This appeared to boost the share price, as the expected offer would have been at a premium to International Paper’s share price when the rumors first circulated. But Suzano ended its takeover attempt in June and the stock price lingered, possibly due to more favorable market conditions.
Meanwhile, International Paper is in the process of a takeover DS Smitha transaction expected to close later this quarter. The deal is expected to result in cost synergies, so perhaps the market is happy with the idea, but I would have thought the shares would have retreated further after Suzano didn’t buy International Paper.
4. Walgreens Boots Alliance – 15.04%
Shares of the well-known pharmacy chain Walgreens Boots Alliance (NASDAQ: WBA) have filled just over 60% this year. Brick-and-mortar pharmacies have not fared well due to increasing competition from online players Amazon and other operational issues such as staffing issues. Walgreens also had to take a $6 billion impairment charge on its controlling stake in VillageMD, which it bought a few years ago.
Walgreens has faced declining free cash flow and also had to cut its dividend in half earlier this year. The company recently reported earnings that exceeded analyst expectations and said it would close 1,200 stores to boost earnings and free cash flow. It could be a watershed story, but many challenges remain.
5. Aptiv — 14.37%
Automotive technology company Suitable (NYSE: APTV) rounds out the group, with more than 14% of shares sold short. The stock is down more than 22% this year. Aptiv has struggled as it makes auto parts for electric vehicles, where demand and production have declined in 2024. The company has a significant presence in China, where its economy has been hit hard by weak consumer demand and a housing market recession. Aptiv is also confronted with increasing competition Volkswagen And Rivaans have joined forces to create a new unit that will create software for electric vehicles.
The bears are wrong…
Let me first point out that the bears could be wrong when it comes to all five of these companies. That is why two parties form a market. You don’t have to write off these stocks, but investing in them will require a good amount of research to make sure you’re comfortable buying.
I think the bears are wrong about Aptiv, which now has several tailwinds. Government stimulus in China should help the country recover, or at least put it in a better position than it has been in. Aptiv also appears to be on decent financial footing, as revenue and profit rose in the second quarter (versus the related quarter). despite the difficult background.
In the second quarter, Aptiv also announced a new $5 billion share buyback program, including an accelerated $3 billion buyback program, showing management’s confidence in the stock. Finally, the company’s price-to-earnings ratio has halved this year to 5.3, and short interest has started to fall from all-time highs, so it looks like the bears are starting to flush out.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bram Berkowitz has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Amazon, Aptiv, Asana, Paycom Software, Paylocity, Volkswagen, and Workday. The Motley Fool recommends Volkswagen Ag. The Motley Fool has a disclosure policy.
These are the 5 most shorted stocks in the S&P 500 Index. The bears are wrong about 1 of them. was originally published by The Motley Fool
