A potential economic recovery, coupled with the federal government’s unprecedented fiscal stimulus, causes the S&P 500 to record all-time highs. But the unemployment rate in the United States, around 10%, has many investors skeptical of the market’s strong recovery.
Investors often use short selling to measure market sentiment. Short sellers place bets on individual stocks. Many times, short-sellers see a critical flaw in the underlying activities of a business. Other times they think that an otherwise high-quality stock has risen too high too quickly.
But while a sizeable short position can be a red flag for some companies, stocks with a high percentage of the short float are often vulnerable to temporary pressures. Short-term pressures are large, short-term spikes in the stock price triggered when short sellers are forced to close their positions at the same time.
S3 Partners analyst Ihor Dusaniwsky says these five best-selling stocks are getting the most attention from direct short sellers in September:
Apple was one of the best performers in the market in 2020 and is up over 80% since the start of the year. In August, Apple made history when it became the first megapack tech stock to reach a market cap of $ 2 trillion, and the stock showed no sign of slowing towards what could be a massive iPhone 5G upgrade cycle. Apple also recently completed a 4-to-1 stock split after a multi-year run to record highs.
Apple’s short sellers can bet that the 5G iPhone launch will be a top for the stock, or they can use Apple as a hedge against long positions in other stocks. Whatever the reason, Dusaniwsky claims Apple has $ 14.3 billion in short-term interest, more than any other stock in the world except Tesla (TSLA). With Apple stocks soaring, short-sellers are stepping into their shoes.
GSX Techedu (GSX)
GSX Techedu is a Chinese online training and mentoring company. The stock skyrocketed over 330% in 2020, but some high profile short-sellers are taking this up. In the last quarter, GSX saw 382% revenue growth and 336% net profit growth, but overdraft companies Citron Research, Muddy Waters Research, and Grizzly Research all accused financial fraud.
In early August, Citron compared GSX to the fraudulent German payment processor Wirecard. Dusaniwsky says short sales in GSX started to ramp up in late March. But many of those short-sellers have suffered heavy losses due to gains since the beginning of the year.
GSX short sellers may be encouraged by other recent Chinese frauds, most notably education company TAL Education Group (TAL). GSX Techedu has $ 2.61 billion in short-term interest, up to $ 336.6 million in the past three weeks alone.
Sea is a mobile and PC gaming platform, e-commerce developer, and marketplace operator headquartered in Singapore. Sea shares have risen about 298% year to date and 1,040% since August 2018 as the global health crisis has given a significant boost to the gaming industry.
Sea went public in 2017, and it is a Free Fire mobile game amassed up to 80 million daily active users. At the end of August, Sea reported nearly 188% annual revenue growth from e-commerce and almost 62% yearly revenue growth from digital entertainment.
While investors in the Sea see a company generating massive growth in a fast-growing technology field, short-sellers may see a stock that can overheat and a company that is not yet to report a profit. The earnings report didn’t deter short sellers. They added $ 185.8 million to their position over the past three weeks, bringing Sea’s total short interest to $ 4.14 billion.
Teladoc Health (TDOC)
Teladoc Health offers virtual access to healthcare providers. In early August, the company announced an $ 18.5 billion merger with Livongo Health (LVGO), a software company developing products to monitor and manage chronic disease.
Some investors have hailed the merger deal as a timely investment to expand Teladoc’s digital and remote healthcare services. But short-sellers may be interested in its debt and its high valuation relative to its historical reach. Teladoc will also take over Livongo’s $ 550 million deficit.
In the second quarter, which ended June 30, Teladoc recorded a 92% increase in paid members. Its stocks increased by around 150% in 2020.
Teladoc’s short sellers added $ 159.3 million to their positions over the past three weeks, bringing the stock’s total short interest to $ 1.69 billion.
Workhorse Group (WKHS)
Tesla received a lot of attention in 2020 because of its share price rise, but it’s not the only fleet of electric vehicles raising some eyebrows. Workhorse’s stock rose more than 480% in 2020, even surpassing Tesla.
Workhorse aims to replace gasoline and diesel delivery vehicles with its electric vehicle vans. Investors see an essential long-term opportunity for the company, but the massive rally in stock has set its bar high. Workhorse now has a market cap of around $ 1.9 billion despite only reporting $ 92,000 in second-quarter revenue.
A growing number of short sellers are starting to see the madness of seemingly random buying EV stock in 2020 as a potential bubble, and Workhorse’s early status could place it among the most vulnerable stocks if the bubble burst. Workhorse has a total of $ 435 million in short-term interest, up from $ 137.9 million in the past three weeks alone. Its selling interest also represents 30.7% of its free float, by far the highest percentage of all five stocks listed.