European financials are seeing new manifestations of the debt crisis, and its leading regulators of some countries to temporarily ban short-selling on their financial stocks.
Short-selling is the practice of borrowing shares today, immediately selling them, and agreeing to buy them back in the future (presumably, at a lower price) to return them to their owner. The profit is the difference between today's price and the lower price when they are bought back in the future.
Share prices for many of the European banks have seen a lot of volatility this past week, for instance, France's Societe Generale shares hit their lowest since the credit crisis. This week also saw a three-month high for the amount of overnight borrowings by banks from the European Central Bank, indicating a need for emergency cash.
In an effort to stem these problems, several countries in Europe (France, Spain, Italy, and Belgium) have decided to institute temporary bans on short-selling their financial stocks. Other European countries including Germany and the Netherlands have said they don't plan on such restrictions.
Short-sale bans were also executed in Europe during September 2008, but the results were mixed. "European bank stocks, while bouncing up in a knee-jerk response in September 2008 when a short-selling ban was announced, dropped sharply over the next few months as the financial and economic crisis worsened," Barclays Capital analysts wrote in a report, according to Bloomberg.
Analysts have varied complaints about the efficacy of these bans. One such complaint is about "partial bans." "The problem with a partial ban -- which is what we have now -- is that it moves the problem to other parts of the system," Bob Penn, a financial regulation partner at law firm Allen & Overy LLP in London, told Bloomberg. "It would be reasonable to expect the short-sellers to turn their attention to non-Italian or non-French banks with significant exposures to those jurisdictions, for example."
Others point out that short-selling is a legitimate and important way to hedge risk. "It means hedge funds can't manage their risk as well as they could before, so you are just increasing volatility," Gemma Godfrey, a wealth manager in London, told Bloomberg. "If they close out their shorts, they have to close out their longs."
No such ban has been instituted in the U.S. recently, but for an idea of which stocks are being targeted by short-sellers, here is a list of the most highly shorted S&P 500 companies.
Do you think these stocks may be susceptible to a short squeeze? (Click here to access free, interactive tools to analyze these ideas.)
1. First Solar (Nasdaq: FSLR ) : Semiconductor Industry. Market cap of $8.97B. Float short at 34.23%. The stock has performed poorly over the last month, losing 15.47%.
2. GameStop (NYSE: GME ) : Electronics Stores Industry. Market cap of $2.93B. Float short at 23.78%. Might be undervalued at current levels, with a PEG ratio at 0.66, and P/FCF ratio at 5.72. It's been a rough couple of days for the stock, losing 5.3% over the last week.
3. Netflix (Nasdaq: NFLX ) : Music & Video Stores Industry. Market cap of $12.82B. Float short at 19.38%. The stock has performed poorly over the last month, losing 18.32%.
4. SUPERVALU (NYSE: SVU ) : Grocery Stores Industry. Market cap of $1.53B. Float short at 19.05%. It's been a rough couple of days for the stock, losing 6.74% over the last week.
5. Lennar (NYSE: LEN ) : Residential Construction Industry. Market cap of $2.63B. Float short at 16.90%. It's been a rough couple of days for the stock, losing 8.68% over the last week.
6. J. C. Penney (NYSE: JCP ) : Department Stores Industry. Market cap of $5.66B. Float short at 16.41%. It's been a rough couple of days for the stock, losing 6.35% over the last week.
7. Federated Investors (NYSE: FII ) : Asset Management Industry. Market cap of $1.81B. Float short at 16.32%. It's been a rough couple of days for the stock, losing 11.11% over the last week.
8. Vulcan Materials (NYSE: VMC ) : General Building Materials Industry. Market cap of $3.91B. Float short at 16.01%. Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 3.31%, current ratio at 2.12, and quick ratio at 1.34. It's been a rough couple of days for the stock, losing 10.37% over the last week.
9. Urban Outfitters (Nasdaq: URBN ) : Apparel Stores Industry. Market cap of $4.74B. Float short at 15.90%. The stock has lost 3.95% over the last year.
10. Novellus Systems (Nasdaq: NVLS ) : Semiconductor Equipment & Materials Industry. Market cap of $2.64B. Float short at 15.52%. Might be undervalued at current levels, with a PEG ratio at 0.72, and P/FCF ratio at 8.11. The stock has gained 18.32% over the last year.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Alexander Crawford does not own any of the shares mentioned above.Data sourced from Finviz.
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