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5 Financial Data Stocks That Could Surge in 2012 - views
BALTIMORE (Stockpickr) -- In the financial industry, you’re only as good as your data. Without the right databases, charts and research reports, investors are left flying blind -- so it’s no surprise that the financial data industry is big business these days.
There are major advantages in data too. Unlike other financial stocks, financial data firms don’t have exposure to lending risks or hefty capital needs, and they tend to have high switching costs built right into their products. That hasn’t meant that the investment outlook has been worry-free for financial data providers, however; this week we’re looking at five heavily shorted financial data stocks that could get squeezed in 2012.
In case you’re not familiar with the term, a short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing share price to skyrocket. One of the best indicators of just how high a short-squeezed stock could go is the short-interest ratio, which estimates the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.
Roberto Pedone also highlighted several short-squeeze opportunities today in " 5 Earnings Stocks Poised to Pop."
Naturally, these plays aren’t without their blemishes -- there’s a reason that these stocks are being heavily shorted. But for investors looking for exposure to a speculative play with a beefier risk/reward tradeoff, these could be powerful upside plays for the coming year.
Without further ado, here’s a look at our list of financial data short-squeeze opportunities for 2012.
Credit ratings agency Moody’s Corporation (MCO) is the quintessential financial data stock. As one of the “big three” ratings firms, Moody’s controls around 40% of the market for debt ratings, a position that gives the firm ample cross selling opportunities among its user base.
Still, that size hasn’t spared Moody’s from getting hit by short sellers: a short interest ratio of 9.2 means that it would take nearly two weeks of buying pressure for sellers to exit their positions in MCO.
The biggest black cloud for Moody’s remains the firm’s contribution to the financial meltdown of 2008, an event that the firm’s ratings were ostensibly supposed to avoid. The inflated ratings that Moody’s (and its peers) put out seriously damaged the firm’s reputation, and will take time to repair.
Even so, MCO is still one of the biggest games in town for debt ratings, and cheap credit costs have re-opened the debt issuance spigot worldwide. With rates expected to remain low for an extended period, that should remain the case for the foreseeable future.
Credit ratings aren’t Moody’s only source of revenues. The firm also sells research and quantitative databases, products that (like ratings) are capital-light and produce impressive margins. With strong financial health and a thriving business, expect this stock to shake out the shorts sooner rather than later.
As of the most recently reported period, Moody's was one of Warren Buffett's holdings, comprising 1.5% of Berkshire Hathaway's total portfolio.
MSCI (MSCI) develops investment indexes and portfolio risk tools that are used by investment managers and analysts to construct investment funds and measure performance. As alternative investment strategies proliferate the market, alternative index products are becoming crucial tools to adequately measure how a fund is stacking up. That leaves MSCI with ample room to license its newer index products right now.
At the same time, the popularity of ETFs has left fund sponsors searching for unique index funds to pitch to investors; MSCI has been a major licensee for ETFs, particularly in through emerging market indexes.
The vast majority of MSCI’s customers access the company’s offerings through subscriptions , providing MSCI with a recurring revenue stream that renews at approximately 85%, thanks to the extremely high switching costs involved with changing a performance index or risk analysis tool.
Like Moody’s, MSCI benefits from an asset-light business model that generates deep net margins and throws off impressive cash flows. With short-sellers bidding the firm up to a short ratio of 9.2, this financial data stock presents an attractive short squeeze opportunity.
As of the most recently reported period, MSCI comprised 4% of Eton Capital's portfolio.
It’s been a relatively tepid year so far for shareholders of Morningstar (MORN), the $3 billion investment research provider. Shares of the firm have only jumped 2.2% year-to-date in 2012, versus returns of 7.1% for the broad market.
So will Morningstar be able to make up the lost ground? That certainly looks to be the case.
A lot has changed at Morningstar since it was founded in 1984 as a repository of mutual fund research. While mutual funds are still what the company is known for, Morningstar has carved out an attractive niche as a stock research, investor education, and personal finance site -- but the firm’s foray into credit ratings have particular potential. The firm, after all, is one of the few that already has the scale to compete with stalwarts like Moody’s for a piece of the ratings market.
Morningstar’s subscription model has been good to the company’s coffers, driving stair-step revenue growth and the double-digit net margins investors have come to expect from the financial data industry. While a more serious foray into credit ratings won’t be cheap, the company’s debt-free balance sheet and ample cash reserves should be an offsetting factor for investors.
A short interest ratio of 11.1 means that it would take more than two weeks for short sellers to cover their positions in this stock. Earnings on Feb. 15 are the next big upside catalyst for shares.
Bankrate (RATE) went public in last June, in what amounted to one of the more successful IPO stories of the year. While “more exciting” high-profile tech names such as Groupon (GRPN) floundered in the months after their offering dates, Bankrate rallied more than 40% from its first print back in June. Of course, not all of that attention has been good, and now short sellers are waiting for the other shoe to fall, pushing RATE to a short ratio of 12.
While most of the other names on this list have made their money by courting institutional and other professional investors, Bankrate’s business is centered on consumer personal finance. By matching up consumers with mortgages, insurance, and around 300 other financial products in a transparent way, the company is able to keep both its customers and financial firms happy. That’s clear from the firm’s financials: the firm saw relatively stable growth throughout the recession, minus a slight sales contraction in 2009.
With short-sellers counting on a material misstep in Bankrate’s performance, they may be sorely disappointed. The fact remains that consumers are becoming more and more discerning about their financial products, and Bankrate’s services are still one of the most popular tools to evaluate them on an even playing field.
Once this stock gets more operating history under its belt, shorts should start to shake out.
Financial data firm Thomson Reuters (TRI) has room for improvement in 2012. That’s because the firm is coming off the heels of a 28% decline in 2011, a year when the broad market effectively closed the year flat as a board. Now management has something to prove in the year ahead.
While Thomson Reuters may be best known for its news service, the firm’s most significant business is actually its markets data platform, which licenses data to financial professional through pricey terminals. Competition is fierce in the terminal business, with very sticky customers and rivals like Bloomberg laying claim to a significant mindshare of the market. Because investment professionals essentially commit to learning the proprietary commands of a system, they’re less inclined to change once they’ve picked one. Still, Thomson Reuters has a slight edge in this industry for now; the company will need to continue to evolve its offerings if it wants to keep it.
The company also has a significant non-investment business, providing legal, scientific, and healthcare data to professionals in those respective fields. For all intents and purposes, investors should assume that this business has the exact same upside and challenges as the markets division. With blood in the water after a major downtrend last year, TRI currently has a short ratio of 9.6 tomorrow’s earnings call may be the big catalyst this firm needs to spur a short squeeze.
To see this week’s short squeezes in action, check out the Financial Data Short Squeeze portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.