In a stock market like we've been going through this year, everyone is having a tough time, whether you've got just a few dollars in the game or billions, like Wall Street professionals. Arguably, the billionaires running hedge funds are having an even more difficult time than the small retail investor.
While their first-half performance beat the S&P 500, according to BarclayHedge, an institutional-investor services division of Backstop Solutions, hedge funds are now suffering sustained redemptions by investors.
Image source: Getty Images.
Much of those gains that hedge funds made came from shorting stocks. Bloomberg reported that the rate at which hedge funds were shorting stocks and exchange-traded funds hit levels in the first half of the year that have not been seen since the 2008 financial crisis.
The following four stocks are among the most hated by hedge funds and other short-sellers as they have some of the highest short-interest ratios of any stocks on the market. That's not reason enough to buy into these businesses, though, as hoping a short squeeze erupts to send a stock "to the moon" is not a viable strategy. Sometimes, these are truly busted businesses and deserve their cheap valuations, so let's see if any of these reviled stocks are worth buying.
Nordstrom (short interest: 20.7%)
Upscale-retailer Nordstrom (JWN -1.32%) had been a surprising standout retailer earlier this year when the broard market index was being driven down into bear market territory. It had been up by as much as 30% back in April, but a disappointing earnings report in late August sent shares careening lower. As consumers had to forego buying clothes in favor of food and gas, almost all retailers felt the impact of inflation and high gas prices.
While net sales still rose 12% for the period and adjusted earnings per share jumped 65%, "customer traffic and demand decelerated significantly beginning in late June," the company said. This led the retailer to cut its full-year sales and profit guidance. Earnings were hardest hit: The company's previous forecast of $3.20 to $3.50 per share was slashed to $2.30 to $2.60 per share.
Nordstrom and its aspirational luxury market are still growing. With the stock trading at just seven times trailing and forecasted earnings while going for a fraction of its sales and expected earnings growth rate, this retail stock may still be one to buy to bet against the hedge funds.
Carvana (short interest: 27.4%)
Supply chain disruptions have wreaked havoc on the automobile market, as delays in parts to finish cars led to a shortage of vehicles on dealer lots. That's had a ripple effect in the used-car market, as well, causing inventories to fall and prices to rise. This situation has hit online used-car dealer Carvana (CVNA 0.94%).
While its own quarterly earnings report showed it sold more cars this year than last, the company missed Wall Street expectations on the top and bottom lines. Carvana has had difficulty adjusting to changing consumer preferences in car shopping in the post-lockdown economy.
During the early stages of the pandemic, when people were forced to stay in their homes, buying everything online (including cars) was a necessity. But that's no longer the case, and Carvana has struggled.
The car dealer is still posting significant, albeit slightly narrower, losses. And earlier this year, it announced it was laying off the equivalent of 12% of its workforce. As high as used-car prices are, new-car prices are rising even faster. That's always going to make a convenient outlet like Carvana a destination for used-car shoppers.
FuboTV (short interest: 27.6%)
Although live-streaming sports broadcaster FuboTV (FUBO -0.72%) has more than doubled off the lows it hit in July, the stock is still down nearly 70% in 2022 and more than 85% below its 52-week highs. Trading at under $5 per share, it's not exactly the high-flying growth stock it was last year. In fact, it's only about half the value of its $10 per-share 2020 initial public offering (IPO) price.
FuboTV is a loss-generating operation at the moment, and though its second-quarter earnings report last month showed losses widening over the year-ago period, they were much lower than what Wall Street was forecasting. Revenue was up, too, for the period. While FuboTV missed analyst expectations, ad sales increased, as did the number of subscribers it boasts.
The market has not been kind this year to stocks that rely upon digital advertising because of the fear spending will be cut in a recession, but FuboTV is showing it can still attract ads and customers. Both will be critical to its goal of becoming free cash flow positive by 2025.
FuboTV's one-day price spike last month seemed a classic short squeeze. While it has settled down since, it remains higher than it was. Now, the streaming stock needs to prove its earnings report was not a one-hit wonder if it wants to claw back more gains from the market.
Bed Bath & Beyond (short interest: 40.4%)
Bed Bath & Beyond (BBBY) is the most shorted stock on the market, with more than 40% of its shares sold short. The home-goods retailer once held a lot of promise in making a recovery, but not even its status as a meme stock has been able to keep its stock afloat.
Its collapse last month was caused by activist investor Ryan Cohen cashing out his entire stake in the home-goods retailer, an apparent loss of confidence in Bed Bath & Beyond's ability to make the turnaround. The high short interest in the retailer suggests the market has little confidence, too.
It's undergoing yet another reorganization after it ousted its CEO after a little more than two years in the position and is trying to shake up its product mix once more to lure customers back in. As a company that was routinely a cash-generating machine producing copious amounts of free cash flow, Bed Bath & Beyond is now burning through cash and needed to secure new financing commitments for more than $500 million.
I had once been hopeful Bed Bath & Beyond would be able to make the change. However, its continued spiral downward suggests there's still a ways to go before the retailer hits bottom.
