What Do Short-Sellers Have Against These 3 Companies?

Pessimism is building against these three popular investments. Is an increase in short interest warranted, or are pessimists blowing smoke?

Sean Williams
Sean Williams
Jul 28, 2014 at 11:25AM
Investment Planning

The best thing about the stock market is that you can make money in either direction. Historically, stock indexes tend to trend upward over the long term. But when you look at individual stocks, you'll find plenty that lose money over the long haul. According to hedge-fund institution Blackstar Funds, between 1983 and 2006, even with dividends included, 64% of stocks underperformed the Russell 3000, a broad-scope market index.

A large influx of short-sellers isn't a condemning factor for any company, but it could be a red flag indicating that something is off. Let's look at three companies that have seen rapid increases in the number of shares sold short and see whether traders are blowing smoke or if their worries have merit.


Short Increase June 30 to July 15

Short Shares as a % of Float

Monsanto (NYSE:MON)



Alaska Air (NYSE:ALK)



Inovio Pharmaceuticals (NASDAQ:INO)



Source: The Wall Street Journal.

I'll gladly pay you Tuesday for a share buyback today
Sometimes it can be difficult to figure out exactly what has the goat of pessimists on a week-to-week basis. Genetically modified seed producer Monsanto has quite vocal opposition to enhancing crops through genetics. However, over this recent period, it was readily apparent why short-sellers piled into Monsanto.

Source: Flickr user Illuminating9_11.

The big news that pessimists latched onto was the announcement in late June of a mammoth $4.5 billion debt offering by Monsanto spread out in seven different senior note offerings that mature beginning in 2017 and run through 2064. Normally, the expectation from investors and Wall Street following an offering of this magnitude would be that Monsanto is poised to expand its business or perhaps make an acquisition. Instead, Monsanto announced its intention to fund a $6 billion accelerated share repurchase. That's right, folks: Monsanto added $4.5 billion in debt to rebuy its own common stock. This is part of Monsanto's plan to repurchase $10 billion of its own stock over the next two years. 

The big advantage here for existing shareholders is that this buyback will reduce the number of shares outstanding and should push Monsanto's EPS higher. If investors or the Street notice Monsanto trading cheaply relative to its peers, it could push its share price higher and be a boon for stockholders.

Then again, the idea here is that as profits are weighed against fewer outstanding shares, it could create the perception that Monsanto's profits are soaring, when in reality its growth rate, while good, is nothing special. Over the first nine months of 2014 Monsanto has delivered $13.2 billion in sales and $5.43 in adjusted EPS compared to $12.7 billion in sales and $5.01 in EPS last year. This demonstrates a steady increase in demand for crop yields as the world's population increases, but it makes the company's goal of doubling core EPS over the next five years seem unrealistic.

That's where the share buyback comes in. Monsanto is planning to repurchase what equates to 16% of its outstanding shares over the coming two years. That, along with steady share buybacks beyond its two-year commitment, could equate to one-quarter of its forecast doubling in EPS.

Again, share buybacks aren't necessarily bad news for shareholders, but they should be heavily scrutinized when share prices are near their peak and the company in question uses a large debt offering to make that purchase. This is a situation where pessimists may wind up claiming the upper hand, at least in the interim, until Monsanto's top-line growth picks up the pace.

Ready to fly high
For all intents and purposes, the airlines sector is firing on all cylinders. Consumers are traveling en masse as the U.S. and global economies continue to rebound, jet fuel prices have remained largely tame over the past couple of years, and newer planes are making it more efficient than ever for airlines to operate.

But even the perfect scenario for airlines can occasionally mean a few pockets of turbulence along the way. Ask any Alaska Air shareholder who saw their stock spiral last week after the company reported market-topping second-quarter earnings results.

Source: Alaska Air.

For the quarter, Alaska reported a financial highlights column that was a mile long. The company's adjusted EPS increased 53% to $1.13 per share, operating revenue flew higher by 9%, pre-tax margin rose 310 basis points to 14.9%, it lowered its adjusted debt-to-total-capitalization ratio to 32%, and it saw both its yield and PRASM rise by just shy of 3%. It was another fantastic quarter for Alaska heralded by its positive public image and loyal passenger following. It also doesn't hurt that its branded credit card helps keep consumers loyal to the brand while providing those fliers with brand-specific mileage perks.

Yet investors sold off Alaska shares for a number of other reasons. The past couple of weeks have been among the deadliest in commercial aviation history as a trio of tragic crashes have occurred which could cause consumers hesitation in purchasing tickets. In addition, competition in Seattle, Washington, which is Alaska Air's bread-and-butter hub, is beginning to increase as Delta Air Lines has built an international hub in Seattle-Tacoma International Airport. Finally, even though economic fuel costs fell 2.4% year over year, some investors are concerned that an improving global economy will push oil prices, and ultimately jet fuel prices, higher. 

I should also note that The Wall Street Journal's data above is not reflective of Alaska Air's split. In other words, its short interest didn't more than double, but it still increased by roughly 1 million shares!

I believe the reality of where Alaska heads next lies somewhere in between. I may be a little biased, being based in Seattle, but I use Alaska every chance I get. The company is consistent with what it offers its passengers and has a positive image with the public, which translates into a loyal following. But Alaska shares are up significantly over the past year and would need a significant boost in PRASM, not just capacity, to see further upside, at least in my view. To be clear, this isn't a company I'd suggest betting against, but I'd opine that further upside is minimal at best.

Primed for success?
Finally, short-sellers have once again latched onto cancer immunotherapy developer Inovio Pharmaceuticals ahead of what's expected to be a busy year of trial data.

Source: Steven Depolo, Flickr

Just last week Inovio put an "X" in the optimists' column when it reported positive phase 2 data for VGX-3100 in women with cervical dysplasia associated with human papillomavirus types 16 or 18. According to its press release, 49.5% of women treated with VGX-3100 saw a statistically significant regression of their cervical intraepithelial neoplasia 2/3 (CIN2/3) into CIN1 or no disease. Comparatively, the control arm witnessed a reduction to CIN1 or no disease of just 30.6%. The treatment also appeared to be well tolerated, with the exception of redness around the administration site, relative to the placebo.

What this study demonstrates is that there could be a big market opportunity for nonsurgical cancer-fighting options. The big question is whether or not Inovio's larger studies will hit the mark.

What I can say is that Inovio has an all-star supporting cast. In September of last year Inovio announced a partnership with Roche that resulted in an upfront payment of $10 million and the potential to earn another $412.5 million in milestone and development payments. Though its partnership with Roche only covers snippets of its development pipeline, it does put the company on the map and theoretically gives it a possible financial safety net. Not to mention that Roche has among the most accomplished cancer sales forces around the globe.

On the flipside, cancer immunotherapies are still a large unknown with many in early-to-mid-stage studies. Smaller biotechs have traditionally not fared as well when it comes to developing cancer drugs, so that has to be echoing in the back of short-sellers' minds.

As for me, while I remain heavily intrigued by Inovio's vast pipeline, I'd rather hold the uncorking of the champagne bottle until we have late-stage data to wrap our hands around. With that being said, I also don't think I'd have the gall to dare bet against Inovio here, either.