Market volatility is a dinner bell for speculators, and there's no shortage of bearish sentiment for some of the most widely traded companies. Naysayers don't have to stay pessimistic on the sidelines. They can sell stocks short, profiting from the potential declines.
It isn't easy to make a living betting against stocks given the market's historical tendency to inch higher, but clearly there are always more than a few implosions along the way. Shorts can pile on companies where they see greater downside than upside, hoping that upbeat market momentum or positive catalysts don't squeeze them out.
Let's take a close look at five companies with the largest number of shares sold short as of mid-March, according to the latest data from the exchanges.
| Company |
March 14 |
December 31 |
|---|---|---|
|
Sirius XM Radio (SIRI +0.00%) |
224.2 million |
267.7 million |
|
Intel (INTC +12.10%) |
222.5 million |
215 million |
|
Frontier Communications (FTR +0.00%) |
206.9 million |
195.9 million |
|
AT&T (T 1.17%) |
199.2 million |
131.8 million |
|
Micron Technology (MU +2.58%) |
124.7 million |
115.1 million |
Source: Barron's.
Feeding the bears
We can start with Sirius XM, which just happens to be the only name of the five to have actually seen its short interest decrease since the year began. Sirius XM is routinely the most shorted stock in the country by share volume, but that wasn't the case at the end of February, when both Intel and Frontier Communications had more skeptics.
The satellite radio provider took a breather from the naysayers when its majority stakeholder had an offer on the table to acquire the entire company. The proposal -- unpopular with many individual investors who believe it didn't command enough of a premium -- was pulled on March 13, giving shorts an ideal opportunity to buy back in now that the downside is no longer limited.
Intel has been a fixture among the most shorted stocks. Folks aren't buying desktops and laptops the way they used to, and that naturally pressures Intel's flagship microprocessor business. Intel isn't stupid. It has been making inroads to matter more in tablets and other mobile computing gadgetry that is gaining market share at the expense of PCs.
Things haven't been great for Intel. Revenue and profitability have declined in each of the past two years. Analysts see a slight dip in earnings per share on flat top-line growth in 2014. However, the shorts are ignoring that a global economic recovery probably will breathe new life into PC sales and other Intel products.
Frontier Communications is a provider of regional telco services with an emphasis on rural markets that aren't well served by the industry's larger players. Folks are kissing their landlines goodbye, but Frontier is helping offset that with growth in broadband connectivity. The bearish argument is that Frontier's flagship services will either fade in time or face stiff competition. However, shorts have to keep in mind that Frontier offers a steep 7.1% yield. The bears are betting that it's not sustainable, but it does increase the price of riding this one out as a short.
AT&T is one of the telco giants that Frontier bears feel will eventually make a dent, but there's also no shortage of skeptics when it comes to Ma Bell. AT&T has seen its short position more than double over the past year, and it's the one stock in this list with the biggest uptick in shorting activity since the year began. Despite the growing popularity of mobile computing devices including smartphones and tablets, competition is starting to get fierce when it comes to pricing. Analysts see revenue growing just 2.4% this year at AT&T, decelerating to 1.4% come next year.
Finally, we have Micron Technology. Declining flash memory and DRAM prices have held Micron back lately, but the stock still got a boost this morning from a bullish note out of Stifel. Reiterating its buy rating and its $31 price target, Stifel believes that Micron has the ability to withstand lower selling prices. Micron actually reports quarterly results on Thursday, so we'll get fresh financials to see how the tech bellwether is holding up.
Don't lose your head
Investors on the long side of these five stocks don't need to panic. Many of these stocks have been able to climb the proverbial wall of worry despite having large short positions. If anything, bullish developments could trigger short squeezes that would drive the prices here as skeptics cover their negative wagers. However, it's still important to keep in mind that a lot of people think these stocks are going down. Bulls and bears can't both be right.
