For many investors, 2022 has been a miserable year. But for short-sellers, watching the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite each fall into a bear market has been pure bliss. Short-sellers are investors who make money when the price of a stock declines.
Yet, in spite of this market turmoil, billionaire money managers haven't been chased to the sidelines. Rather, most successful fund managers have been aggressively putting their money to work -- sometimes even in heavily short-sold companies that skeptics believe will head a lot lower.
Based on the latest round of 13F filings with the Securities and Exchange Commission, there are two heavily short-sold stocks billionaires can't stop buying.
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Upstart Holdings
The first stock that short-sellers and at least one billionaire money manager love is cloud-based lending platform Upstart Holdings (UPST 3.90%). As of the end of October, 24.72 million shares were held short, which represents 35.2% of the company's float (i.e., tradable shares).
If you're wondering why short-sellers have flocked to Upstart, look no further than the Federal Reserve's hawkish monetary policy shift. In order to tame historically high inflation, the Fed has had no choice but to rapidly raise interest rates, even as the stock market plunges. The federal funds target rate has jumped an aggregate of 375 basis points since the year began.
The problem for Upstart is that as lending rates rise, loan demand declines. A smaller number of loans to process, coupled with the growing likelihood that loan delinquencies and/or charge-offs will climb, is a bad combination. Since hitting its all-time high in October 2021, Upstart has plummeted an unsightly 95%.
But that hasn't stopped billionaire Ole Andreas Halvorsen of Viking Global Investors from taking a sizable stake. Halvorsen's fund purchased just shy of 1 million shares of Upstart during the third quarter.
The most exciting aspect of Upstart's operating model is that it's differentiated. Instead of relying on old loan-vetting procedures, the company leans on artificial intelligence (AI) and machine-learning software. The result is that 75% of approved loans are fully automated -- this saves its lending partners time and money -- and a larger percentage of loan applicants are being approved. Even though applicants approved through Upstart have lower average credit scores than the traditional review process, the delinquency rates between the two are similar. In other words, Upstart can increase the prospective lending pool for credit unions and banks without increasing their credit-risk profile.
Another reason Halvorsen piled into Upstart might be its long-term opportunity. This year, the company expanded into auto loan origination and small business loans. On a combined basis, these addressable loan origination markets are 10 times the size of personal loans, which is where Upstart has made its living for years.
As I stated earlier this week, Upstart is likely in for a bumpy ride until the Fed substantially slows the pace of its rate hikes. But given its technological edge in an industry ripe for disruption, Upstart has the intangibles to be an intriguing buy for patient investors.
Image source: Getty Images.
Petco Health and Wellness
A second heavily short-sold stock that billionaire money managers and pessimists have favored equally is pet-focused retail and wellness company Petco Health and Wellness (WOOF 1.28%). When the curtain closed on October, 17.61 million shares of Petco were held by short-sellers, equating to 21.7% of the float.
On a trailing-12-month basis, Petco has certainly been a dog, with shares dropping by 54%. Petco's poor performance really accelerated over the summer after its second-quarter earnings and full-year forecast missed the mark with Wall Street analysts. The company noted that integration costs following its buyout of veterinary joint venture Thrive increased expenses during the second quarter. Also, like other retailers, Petco is contending with supply chain headwinds tied to the COVID-19 pandemic and historically high inflation.
However, these headwinds didn't stop billionaires Ken Griffin of Citadel Advisors or Steve Cohen of Point72 Asset Management from piling into Petco stock during the third quarter. Griffin's fund added nearly 5.57 million shares of Petco, which increased its stake from just over 73,200 shares as of June 30, 2022. Meanwhile, Cohen's stake was a new position totaling close to 555,000 shares.
One reason for Griffin and Cohen to be optimistic about Petco is the recession-resistant nature of the pet industry. It's been more than a quarter of a century since year-over-year U.S. pet expenditures declined. Further, the percentage of households that own a pet is higher than ever, according to the latest survey from the American Pet Products Association. The takeaway is that pet owners will pay big bucks to ensure the health and happiness of their predominantly furry "family member(s)."
Petco has also undertaken a multiyear operating shift that's focused on subscription services. Although most pet owners are familiar with Petco's retail stores, they may not realize that it's pushed into the pet insurance arena, has a burgeoning veterinary care segment, or offers a Vital Care membership, which provides discounts on products and grooming. Subscription services help drive repeat visits, can boost customer loyalty, and should improve the company's operating margins over time.
Despite its recent share price weakness, I side with Ken Griffin and Steve Cohen in thinking that Petco Health and Wellness looks like an amazing deal at just 12 times Wall Street's forecast earnings for next year.
