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The recent rally of Tesla Motors has been nothing short of extraordinary. In the last six months, shares of the electric car company are up nearly 300%.
A number of positive events have contributed to the rally (two better than expected earnings reports, a new leasing program, and plans for a fast-charging network, among other things), but the primary factor has been the high short interest. Last spring, half of Tesla's floating shares had been sold short -- a number which has been cut in half in recent months.
High short interest does not guarantee huge returns, but it does make those sort of rallies possible. Walter Energy (NASDAQOTH: WLT ) , Vera Bradley (NASDAQ: VRA ) , and USANA Health Sciences (NYSE: USNA ) are all stocks with Tesla-like short interest.
Walter Energy is a victim of coal's decline
Walter Energy is a major producer and exporter of metallurgical coal -- a key component in the production of steel.
About half of Walter Energy's floating shares have been sold short, and so far, the bears have been right -- over the last year, the company has lost more than two-thirds of its value.
Coal prices have been weighed down by a variety of factors, including concerns over China's economic growth. With China's infrastructure build-out driving the demand for steel, weakness in the Chinese economy could further depress the market for coal.
Walter Energy is losing money -- last quarter, it lost $0.55 per share. The company has slashed its dividend down to just $0.01, and has said it will look to sell assets to raise cash.
Ultimately, the fundamentals for Walter Energy look terrible -- which is likely why it's so heavily shorted. But a rebound in the coal market, perhaps prompted by an Chinese economic resurgence, or resolution to the European crisis, could see Walter Energy shares rapidly appreciate.
Chinese economic data has begun to improve in recent weeks. In July, Chinese exports rose 5.1%, far better than the 3% that economists had expected. Import data was even better -- increasing 10.9% compared to a 2.1% estimate.
Europe, too, has shown some signs of life. In the second quarter, Eurozone GDP grew at an annualized rate of 1.1% and exports rose 3% in June. Meanwhile, auto demand has improved -- in the second quarter, the European operations of both Ford and General Motors lost less than they had anticipated.
If the global economy rebounds, coal prices will move higher, and Walter Energy could defy its many critics.
Vera Bradley may have fallen out of favor
Like Walter Energy, about half of Vera Bradley's floating shares have been sold short, and like Walter Energy, the bears have been accurate in their assessment -- Vera Bradley shares are down about 20% in the last six months.
But Vera Bradley's problems aren't as simple as Walter Energy's. As a maker of luxury handbags, it's more susceptible to shifts in consumer preference.
Increased competition from companies like Michael Kors could weigh on Vera Bradley, as could the company's continued lack of a permanent CEO.
But, Vera Bradley is still a growing company. Earlier this month, the company said it would add 128 design jobs at its design and distribution center in Indiana, expanding its workforce by about 5%.
Moreover, there's still evidence to suggest that Vera Bradley remains a desirable brand. Consider a recent Lancaster Online story. The site, which focuses on the local community of Lancaster, Pennsylvania, interviewed a number of Vera Bradley customers ahead of the opening of a new store, ultimately concluding that "the prevalence and popularity of Vera Bradley products with women of all ages probably will not fade anytime soon."
From a financial standpoint, the stock is far from expensive. With a price-to-earnings ratio of 13 and a forward P/E of 11, the stock is cheaper than the broader market.
Then, there's issue of a CEO. If the company can bring in an exciting new CEO with a strong background, it could lead to a relief rally, as investors become more hopeful about a turnaround. New CEOs also frequently benefit from a "honeymoon period," where investors may discount current results as the product of a past regime.
Given that the company is continuing to expand, future earnings could beat expectations. At the same time, if the company were to name a well-regarded executive as CEO, it could trigger a relief rally. Both factors, combined with the stock's high short interest, could lead to higher returns.
USANA is a multi-level marketing firm
USANA's fate is intertwined with another publicly traded multi-level marketing company, Herbalife. Activist hedge fund manager Bill Ackman is currently waging a war against Herbalife, alleging that the company is running a pyramid scheme.
Ackman limits his criticism to Herbalife alone, but what he accuses Herbalife of could easily be applied to the multi-level marketing business model in general.
Ackman is after nothing less than a Herbalife kill switch -- he wants the FTC to shut the firm down. If he gets that, shares of USANA should plummet in sympathy, as investors would doubt the viability of the company's business.
But there are plenty of investors that doubt Ackman's thesis. Most notably, hedge fund titans Carl Icahn and Dan Loeb.
If the FTC were to exonerate Herbalife -- either by investigating and concluding that there is nothing wrong with the firm, or simply failing to act, it would clear up the cloud of uncertainty surrounding the MLM industry.
In that case, USANA shares could continue their impressive rally. Year to date, USANA is up more than 145%, and could continue to move higher in light of the high short interest -- about 37% of USANA's floating shares have been bet against.
USANA is a profitable company -- last year, it generated almost $100 million in cash flow. Last quarter, earnings rose roughly 55% while revenue jumped almost 18%. Moreover, it's trading at a below market multiple.
As long as regulators avoid the MLM industry, this stock could continue to reward shareholders.
Looking for the next Tesla
To be clear, Walter Energy, Vera Bradley and USANA are all companies facing challenges. Highly shorted companies are that way for a reason.
But should the arguments of the bears fail, these stocks could be poised for huge gains. As with Tesla, highly shorted stocks that begin to build positive momentum can go on a roll, as the traders that shorted the stock are forced to cover their bad bets.
That might not happen with these stocks, but it's certainly possible.
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