Last year was challenging in many respects for investors. The unprecedented coronavirus pandemic upended societal norms and rapidly transformed the traditional work environment. It also played at the heartstrings of Wall Street, with the benchmark S&P 500 losing 34% of its value in less than five weeks during the first quarter.
However, one index shone especially bright amid the chaos: the Nasdaq 100.
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Short-sellers are piling into these Nasdaq 100 stocks
Consisting of 100 companies, this growth-focused, large-cap index has powered higher by 42% over the trailing year through Jan. 29. That more than triples the nominal return of the S&P 500 over the same period. Historically low lending rates have allowed growth stocks to borrow cheaply in order to hire, acquire, innovate, and otherwise expand their operations, thereby fueling these huge gains.
But optimists aren't the only ones with eyes on these front-and-center growth companies. Short-sellers -- investors who make money when the share price of a stock falls -- have honed in on quite a few Nasdaq 100 companies.
Currently, the following 10 Nasdaq 100 stocks have the highest short shares held relative to their outstanding floats (data courtesy of Finviz as of Jan. 29):
- Sirius XM (SIRI +0.00%): 18.99% of float held short
- Check Point Software Technologies: 9.9%
- Analog Devices: 8.25%
- Charter Communications (CHTR +1.63%): 7.81%
- Tesla Motors (TSLA 5.46%): 7.43%
- Fox Corp.: 7.07%
- Moderna (MRNA 1.84%): 6.96%
- Peloton Interactive: 5.99%
- Advanced Micro Devices (AMD +3.36%): 5.97%
- Atlassian: 5.34%
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Skepticism has its merits with some of these popular holdings
While not all of these businesses deserve the pessimism thrust upon them by professional and retail investors, the above list of Nasdaq 100 stocks does contain quite a few companies with big question marks.
For example, electric-vehicle (EV) manufacturer Tesla Motors has put up jaw-dropping gains of 600% over the trailing year and 16,420% over the trailing decade. It also became the first automaker to build itself from the ground up to mass production in more than five decades. But it wouldn't be profitable on a recurring basis without selling renewable energy credits (REC). In each of Tesla's past five quarters, these RECs have been the sole reason the company reported a positive net income, based on generally accepted accounting principles (GAAP). Investors shouldn't have to worry about a $752 billion company being unable to generate a recurring profit from its primary product.
Another good example of a company where short-sellers might have legs is drug developer Moderna. Most folks are probably familiar with Moderna as one of the two biotech stocks to receive emergency use authorization approval from the U.S. Food and Drug Administration for its coronavirus vaccine. While there's no question Moderna will see a huge lift in 2021 sales as a result, the vaccine space should grow more crowded over time. Since most biotech stocks trade at no more than six times peak annual sales, Moderna's $68 billion valuation is at an eyebrow-raising high.
Even a slower growth stock like cable and broadband service provider Charter Communications might be worthy of its high short float. Charter has been using its broadband gains to fight back against cable cord-cutting. Though the company continues to grow, its sales are only ticking higher by 5% to 6% annually. The bulk of the company's momentum has come from aggressive share buybacks, which are lifting earnings per share. But based on Charter's mediocre growth rate, it hardly appears deserving of a price-to-earnings ratio of 30.
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Is a short squeeze imminent?
On the other hand, there are some solid companies here that could eventually squeeze short-sellers out of their positions.
For instance, satellite-radio operator Sirius XM, the most short-sold stock in the Nasdaq 100 by a long shot, finds itself in much better shape during economic downturns and recessions than its terrestrial and online radio competitors. Sirius XM generates most of its revenue from high-margin subscriptions instead of ads. When contractions or recessions arise, advertisers are quick to pull back on their spending. By comparison, subscribers hardly budge on their spending during downturns. In fact, Sirius XM saw its subscriber revenue increase through the first nine months of 2020. This is the sort of stock that can be dangerous to bet against.
The same could be said for chipmaker AMD. I admit that it took me a long time to come around to the AMD bull case, especially with the company stalling at around $40 a share on a couple of occasions prior to 2019-2020. But it's pretty evident that AMD is continually chipping away at Intel's processing market share, and the company has done an excellent job of diversifying its revenue stream to include gaming console processors and graphics cards. Even during the worst economic downturn in decades, AMD reported a 45% increase in year-over-year sales, as well as a 2-percentage-point boost to gross margin.
While understanding how short interest can affect a stock is important, it's even more important to realize that short float is one of many metrics that investors should consider before and after making an investment. In other words, don't let short interest be your sole factor for buying into or betting against a stock.
