Since everyone loves a winner, it's reasonable to assume that everyone hates a loser -- everyone but short-sellers, at least. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into profits.
Below we take a look at regional banker Huntington Bancshares
Huntington Bancshares snapshot
|Market Cap||$5.9 billion|
|Revenues (TTM)||$1.9 billion|
|1-Year Stock Return||51.9%|
|Estimated 5-Year EPS Growth||6.2%|
|Return on Investment||N/A|
|Dividend and Yield||$0.16/2.3%|
|Shares Short Sep 14||27.2 million|
|Shares Short Aug 31||15.3 million|
Sources: wsj.com, FinViz.com. N/A = not applicable.
Just because the shorts are piling in doesn't mean you should, too. Such stocks could have serious problems that warrant their short interest, but they might also just be stricken by short-term troubles. Only Foolish due diligence will tell you for certain, and our 180,000-strong CAPS community offers a good place to start.
The short story
At the end of June, with Huntington's stock hovering just above $6 a share, I saw that it still had clear potential to regain the momentum that had then started flagging. Its loan portfolio was improving, loss provisions were being cut, and it was lending to business filling a void created by its larger brethren. Big-name banks like JPMorgan Chase
Huntington is scheduled to report earnings in two weeks, and short-sellers may be piling in early in anticipation of a misstep for a company that has been on a fairly strong streak. The stock is up 28% in 2012, ahead of the 26% year-to-date gain of the KBW bank index, and analysts at Bernstein Research for one think the era of regional bank outperformance is quickly drawing to a close. They downgraded Huntington, BB&T
Yet credit quality is steadily improving, consumer checking is solidly gaining, and commercial relationships are flexing their muscles. Analysts anticipate a modest 6% increase in earnings this quarter to $0.17 per share on a similar jump in revenues to $704 million, with full year results revised upwards $0.02 to $0.66 a share, a near 12% improvement over last year.
Despite what Bernstein analysts believe, those at Credit Suisse are looking for an upside surprise precisely because of the progress made in asset Huntington in particular has been excelling at. It's likely we'll still find some headwinds and pockets of turbulence; this is a bank still on its way back. The Fed's artificial low-interest rate policies hurt smaller institutions while benefiting the Morgans and Goldman Sachs of the world.
The stock has pulled back slightly from its highs, but I view that as merely a pause before it continues its next leg upward.
Don't sell yourself short
I've rated Huntington Bancshares to outperform the broad market indexes on Motley Fool CAPS, but share your views below on whether short sellers should be squeezed till it hurts, or if the stock ought to be shorted till the sun don't shine.
Want to know why the big banks always win? Check out The Motley Fool's new in-depth company report on Bank of America. It thoroughly details B of A's prospects and gives three reasons to buy and three reasons to sell. Just click here to get access.
Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Huntington Bancshares, Bank of America, and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Goldman Sachs Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.