- Side-Step the Selling With These 5 Big-Name Trades
- 3 Stocks Breaking Out on Big Volume
- 4 Stocks Rising on Big Volume
- 3 Stocks Spiking on Unusual Volume
- A Small Stocks to Play the Ukraine Crisis
5 Heavily Shorted Stocks That Hedge Funds Love - views
DELAFIELD, Wis. (Stockpickr) -- The aristocrats are active on Wall Street, and you should be paying close attention. The big players who run hedge fund are out disclosing their largest stakes through 13F filings. Market watchers are pouring over these filings to find out which sectors and stocks the big money is in love with. One of my favorite things to do when the new 13F filings come out is to look for which heavily shorted stocks that smart money is getting involved in.
Heavily shorted stocks represent opportunity, because if the existing shorts are wrong, then the stock could set up for a monster short-squeeze that sends shares ripping higher. What better way to play a potential short-squeeze then to piggy back the smart money into some of Wall Street's most hated stocks. If the smart money sees opportunity in a heavily-shorted stock, then I will assume they have done extensive research and see something the bears do not.
A short-squeeze is a situation in which a lack of supply and an excess demand for a stock forces the price upward. Once a short-squeeze hits, the bears are typically forced to cover their positions as the price rises rapidly in order to protect themselves from big losses. If a stock starts to rip rapidly higher, then the trend may escalate quickly as the bears rush to get out. If enough short-sellers buy in their positions, then the price can push much higher than you would normally see during an orderly uptrend.
This is why I don't waste much time looking at the blue-chip stocks the Wall Street whales are buying during the 13F season. Instead, I look for the heavily shorted names since I know these stocks have added rocket fuel with their high short interest. All that these stocks need is some positive news and for a solid uptrend to develop. Once the squeeze begins, the gains can be truly breathtaking.
With that in mind, here's a look at several heavily shorted stocks that the smart money is buying here.
One of the hottest hedge fund managers on Wall Street right now is legendary corporate raider Carl Icahn, who runs a $7 billion hedge fund, Icahn Partners. Icahn specializes in activist investing, and his personal net worth is estimated to be $17 billion.
One heavily-shorted stock that Icahn is loading up on here is Herbalife (HLF), which is a global nutrition company that sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products as well as personal care products. This stock has been crushing the shorts all year, with shares up 95% so far in 2013.
Herbalife has a market cap of $6.6 billion and an enterprise value of $6.8 billion. This stock trades at a cheap valuation, with a trailing price-to-earnings of 14.24 and a forward price-to-earnings of 11.44. Its estimated growth rate for this year 22%, and for next year it's pegged at 14%. The current short interest as a percentage of the float for Herbalife is extremely high at 30.6%.
Carl Icahn added 611,354 shares in the second quarter to a total of 17 million shares of HLF. That stake is now valued somewhere around $766 million. Another hedge fund legend that's loading up on Herbalife per 13F filings is George Soros. Soros is said to have a 4.9% stake in Herbalife, valued around $227 million. This stake was Soros' third-largest holding through the second quarter.
Everyone knows the bear thesis on Herbalife by now since one of the bears on the other side of the trade is activist investor and hedge fund manager Bill Ackman. Ackman currently holds a $1 billion short bet against the company. Ackman's short position in HLF has not been kind to him, since he bet against the shares last year before the huge run up. Ackman thinks Herbalife is an illegal pyramid scheme and he's hoping that regulators are going to come in and shut it down. The key word in that last sentence is "hope!"
What's troubling to me about Ackman's short position in HLF is that he's digging in his heels on a trade that has gone horribly against. This is normally a poor risk management strategy when trading in any stock. What's worse is that in his most recent letter to Pershing Square Capital investors, Ackman said that the suicide of a top Herbalife salesman is one sign that the business is falling apart. That seems like one heck of a desperate claim by Ackman, since there has been no evidence to suggest that salesman took his life over anything surrounding Herbalife.
Another problem for Ackman with his HLF short position is that other large hedge fund managers are joining Icahn and George Soros and going long the stock. On Tuesday, news came out that hedge fund manager Richard Perry, founder of Perry Capital, has taken a stake in Herbalife that is less than 5%. According to reports, Perry Capital believes the stock is cheap and the company is not a pyramid scheme.
From a technical perspective, shares of HLF have been trending sideways for the last month, after coming out of a bullish uptrend. That sideways trend has been pushing shares of HLF between close to $60 a share on the downside and $68 a share on the upside. Traders should be on alert for a squeeze off any high-volume move above some near-term overhead resistance levels at $67.69 to its 52-week high at $68 a share and then above its three-year highs at $70.30 a share. Look for volume on that move that hits near or above its three-month average action of 3.28 million shares. If that move triggers, then HLF could easily trade to $100 a share, or possibly even north of $100 a share.
Another heavily-shorted stock that Icahn has boosted his stake in is Chesapeake Energy (CHK), a natural gas and oil exploration and production company. This stock has been on fire so far in 2013, with shares up smartly by 51%.
Chesapeake Energy has a market cap of $16 billion and an enterprise value of $29 billion. This stock trades at a cheap valuation, with a forward price-to-earnings of 11.93. Its estimated growth rate for this year 163.9%, and for next year it's pegged at 30.4%. This company currently sports a dividend yield of 1.4%. The current short interest as a percentage of the float for Chesapeake Energy is pretty high at 11.1%.
Icahn just announced that he's increased his stake in CHK to 9.98% from 8.98%, or a total of 66.5 million shares. This isn't Icahn's first buy of CHK, since he started buying the stock last year after the company ran into management and liquidity issues.
Apparently Susquehanna doesn't agree with Icahn, since the firm cut its rating on CHK this morning to neutral from positive, but kept its price target of $26 on the stock. The firm said much of the recent improvement is now priced into the share price and while all the right rhetoric is in place and old-guard senior managers have left, the gas markets are weak, CHK's easiest divestitures are done, and CHK is now implementing a new capital allocation system. "We expect some integration issues and don't anticipate outperformance of the name in the near term," the firm said.
From a technical perspective, CHK has been uptrending strong for the last two months, with shares soaring higher from its low of $19.24 to its recent high of $25.64 a share. During that uptrend, shares of CHK have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of CHK within range of triggering a near-term breakout trade. That trade will hit if CHK manages to take out its 52-week high at $25.64 with high volume. Look for volume on that move that hits near or above its three-month average action of 11.33 million shares. If that breakout hits soon, then CHK could easily short-squeeze towards its next major overhead resistance levels at $29 to $33, or even $35 a share.
Another major player in the hedge fund world that's loading up on some heavily-shorted stocks here is Steven Cohen, the founder of hedge fund SAC Capital Advisors. Cohen has an estimated net worth of $9.3 billion and Forbes ranks him as the 106th richest man in the world.
One heavily shorted stock that Cohen has taken a new stake in is U.S. Silica (SLCA), which is a domestic producer of commercial silica, a specialized mineral that is a critical input into a variety of attractive end markets. This stock is off to a strong start in 2013, with shares up sharply by 31%.
U.S. Silica has a market cap of $1.18 billion and an enterprise value of $1.43 billion. This stock trades at a cheap valuation, with a trailing price-to-earnings of 15.29 and a forward price-to-earnings of 10.26. Its estimated growth rate for this year 13.2%, and for next year it's pegged at 34.4%. This stock currently sports a dividend yield of 2.2%. The current short interest as a percentage of the float for U.S. Silica is extremely high at 42.8%.
It looks like Cohen has purchased 2.1 million shares of U.S. Silica since the beginning of April. Cohen's bet on U.S. Silica is most likely for the company's increasing role in fracking, since its commercial silica is used as "frack sand" in the hydrofracking process that is popular use among oil and gas players throughout the U.S.
This company just delivered a profit but missed Wall Street expectations, and failed to beat revenue expectations. Adjusted EPS jumped 5.56% to 38 cents per share in the quarter vs. EPS of 36 cents per share in the year-earlier quarter. Revenue rose 24.09% to $129.9 million from the year-earlier period, which missed expectations of $134.57 million.
From a technical perspective, SLCA has been trending sideways and consolidating for the last four months, with shares moving between $24.71 on the upside and $18.12 on the downside. That's a big range, so traders should look for a short-squeeze if SLCA can manage to break out above the upper-end of its sideways trading chart pattern. That breakout will trigger if SLCA manages to take out some near-term overhead resistance levels at $23.83 to $24.71 a share with high volume. If that breakout hits, then SLCA will set up to re-test its all-time high at $28.50 a share.
The real short-squeeze for SLCA will start once it takes out $28.50 with big volume. Look for volume on that move that hits near or above its three-month average action of 1.36 million shares. If we get that move anytime soon, then SLCA could easily tag $40 to $50 a share as the bears rush to cover some of their short bets.
Another heavily shorted stock that Cohen is getting involved in here is Blue Nile (NILE), an online retailer of diamonds and jewelry. This stock has been uptrending during the last six months, with shares up by 16%.
Blue Nile has a market cap of $475 million and an enterprise value of $437 million. This stock trades at a premium valuation, with a trailing price-to-earnings of 49.71 and a forward price-to-earnings of 34.80. Its estimated growth rate for this year 30.2%, and for next year it's pegged at 30.5%. The current short interest as a percentage of the float for Blue Nile is very high at 18.5%.
Cohen just raised his stake in Blue Nile by 104.53% after he purchased a total of 342,114 shares of the stock at an average price of $37.50 a share. Cohen now holds 669,414 shares of Blue Nile.
This company recently reported second-quarter earnings, and its net income jumped 40% on improved revenue. Blue Nile earned $2.2 million or 17 cents per share during the quarter, which is up from $1.6 million, or 11 cents per share, from last year. Revenue increased to $108 million from $91 million on improved sales in both its domestic and international business. For the full year, the company said it expects to earn between 75 and 85 cents per share on revenue between $440 million and $470 million. Wall Street analysts were anticipating earnings of 82 cents per share for the year on revenue of $454.8 million.
From a technical perspective, NILE has been basing and trending sideways for the last two months, with shares moving between $40.44 on the upside and $35.55 on the downside. Shares of NILE have just started to bounce higher right above its 200-day moving average of $35.77 a share, and it's flirting with its 50-day moving average of $38.12 a share. That move is quickly pushing shares of NILE within range of triggering a big breakout trade. That trade will hit if NILE manages to take out some near-term overhead resistance levels at $40.20 to $40.44 a share and then once it clears its 52-week high at $43.54 a share with high volume.
If that breakout triggers soon, then NILE could easily setup for a monster short squeeze. This stock has traded as high as $60 a share, which was a level last seen for NILE back in 2011. I would add to any long position in NILE if it takes out $50 since that's the last major resistance level from 2011 between the stock and tagging $60 a share.
Another billionaire making a big move into a heavily shorted stock is George Soros, the chairman of Soros Fund Management, the $24 billion firm that manages his personal fortune as well as the money belonging to his foundations.
Soros is loading the boat on heavily shorted and troubled department store player J.C. Penney (JCP). The bears have had control of this stock so far in 2013, with shares down sharply by 30%.
J.C. Penney has a market cap of $3 billion and an enterprise value of $5.96 billion. Its estimated growth rate for this year 1.1%, and for next year it's pegged at 62.4%. The current short interest as a percentage of the float for J.C. Penney is very high at 21.3%.
Soros loves shares of J.C. Penney right here, so much that he's added another 2 million shares to his already massive position, according to recent 13F filings. Soros started buying shares of J.C. Penney four months ago and his stake is now reported to be 19.88 million shares. That makes J.C. Penney the fourth largest position in his portfolio, according to Reuters.
Another famous hedge fund manager is reportedly getting involved with J.C. Penney. Bloomberg reported that hedge fund manager Kyle Bass of Hayman Capital Management has entered a long position in the company by buying their debt. Yet another powerful hedge fund manager that is reported to have taken a stake in J.C. Penney is Richard Perry. Perry disclosed that he owns 16 million shares of the stock at the end of the second quarter, or a 7.26% stake.
Let's not forget that Bill Ackman holds a massive stake in J.C. Penney, at around 18% of the company. That said, Ackman is rumored to be preparing to sell his stake after he resigned from the board last week. I believe that once Ackman announces he's sold his stake in the stock, then we could be set for a short-term bottom and potential large short-squeeze. I believe this because Ackman has been dead wrong on the stock since his initial investment, so the market might interpret his capitulation and more than $300 million loss as the bottom for the stock.
From a technical perspective, JCP has been downtrending badly for the last three months and change, with shares falling from its high of $19.63 to its recent low of $12.34 a share. During that move, shares of JCP have been consistently making lower highs and lower lows, which is bearish technical price action. That said, shares of JCP have started to stabilize a bit and rebound off that $12.34 low with some decent upside volume days. Traders can look for a breakout trade to trigger for JCP if it takes out some near-term overhead resistance levels at $13.99 to $14.13 with high volume. Look for volume on that move that hits near or above its three-month average action of 12.74 million shares.
If that breakout hits soon, then JCP could easily rip higher towards its next major overhead resistance levels at its 50-day moving average of $15.74 to $16.75 a share. If Ackman were to sell his stake, then JCP could see an even bigger squeeze back towards its next major overhead resistance levels at $20 to $23 a share. Any high-volume move above $23 will then give JCP a chance to tag its October high of $27 a share.
To see more heavily-shorted stocks the Wall Street whales are moving into, check out the Heavily Shorted Stocks Loved by Hedge Funds portfolio on Stockpickr.
-- Written by Roberto Pedone in Delafield, Wis.
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.