TickerTalk Headlines for June 13th
In this newsletter:
Top 4 Large-Cap Stocks With Major Short Interest
With the ongoing GameStop saga reigniting interest in meme stocks, investors, or more likely traders and speculators, are once again seeking out stocks with high short interest. As the overall market, the technology sector, and many global-leading household stocks trade near all-time highs, trader's appetite for risk and speculative plays may be increasing.
That's where these four stocks, with a considerable short interest, come in. Here, we look closer at four highly shorted stocks that are not penny stocks, exploring whether they might experience significant moves due to their short interest levels.
It's important to remember that investors often perceive heavily shorted stocks as fundamentally flawed, significantly overbought, and overvalued. Those who short these stocks typically believe the market has overpriced them relative to their financial health and growth prospects. So, while a stock with a high short interest could mean a short squeeze is looming, it should also raise an alarm bell for a potential investor. Take a look at four large-cap stocks with significant short interest below.
Novavax Inc.: A Leader in Vaccine Development
Novavax (NASDAQ: NVAX) is a biotechnology company that develops vaccines and biological therapies to combat infectious diseases. The stock has surged an astounding 233% YTD, driven by a $1.3 billion deal and potential approval of its COVID-19 vaccine. On May 14, Novavax inked a licensing deal with Sanofi, including a $500 million upfront payment, up to $700 million in milestone payments, and a $70 million investment in Novavax stock. As of May 15, NVAX is one of the most shorted stocks, with a short interest of 32%, equating to 45 million shares sold short, up nearly 1% from the previous month.
Upstart Holdings, Inc.: Revolutionizing AI-Powered Lending
Upstart Holdings (NASDAQ: UPST), a leading fintech company, operates a cloud-based AI lending platform in the United States. The stock has a significant 34% short interest, increasing by 7% month-over-month. The stock is down nearly 42% YTD, with no signs of recovery, and has fallen almost 7% over the last month. Analysts remain bearish, with a consensus reduce rating and a price target predicting a further 9% downside.
C3.ai, Inc.: Pioneering Enterprise AI Solutions
C3.ai (NYSE: AI) offers AI solutions for enterprise optimization and decision-making. Despite lagging the market with only a 9% YTD gain, the stock surged over 30% in the last month due to strong Q4 earnings, where revenue rose 20% year-over-year to $87 million. Despite these positive results, short interest remains high at 28%, or 34 million shares sold short, an increase of over 3% from the previous month. Analysts maintain a neutral stance with a consensus Hold rating and a price target close to the current stock price.
Comstock Resources, Inc.: Leading Independent Energy Company
Comstock Resources (NYSE: CRK) is an independent energy company focused on natural gas and oil production in the United States. CRK shares have risen nearly 36% YTD and almost 20% in the last month. Despite this performance, sentiment is bearish, with analysts maintaining a consensus Hold rating and a price target forecasting nearly 14% downside. The stock has a short interest of almost 35%. A notable factor is the lack of insider selling over the past year, with one insider purchasing $100 million worth of stock in Q1.
The Bottom Line on High Short Interest Stocks
As meme stock mania continues, stocks with high short interest, like Novavax, Upstart, C3.ai, and Comstock Resources, may attract renewed interest from those hoping for a short squeeze. Monitoring these stocks for potential short squeezes could provide valuable opportunities amid the broader market's strength. Still, it's also imperative to remember that a high short interest might signal an overbought scenario and potentially a fundamentally flawed company.
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Buffett Boosts Stake, Triggers Options Boom in Occidental Stock
Options traders are known as either the smartest of the bunch out there or the most willing to take on increased risks. When someone buys an option – particularly a call option – that person is betting on the direction of a particular stock and the timing upon which that stock will reach a specific price. Getting any of these two factors wrong could mean a 100% loss of principal.
It is interesting to see how this options tracker caught Occidental Petroleum Co. (NYSE: OXY) in a call option breakout. Many traders flocked in, wanting to see the stock at a higher price relatively soon. Of course, this move is warranted by the news that Warren Buffett is upping his stake in the company, which is always a reason for bullish traders to celebrate.
However, monetizing what’s in the rear-view mirror is often challenging, so investors can look elsewhere for opportunities within the energy sector. This time, earnings per share (EPS) growth prospects are of the essence if some are to beat the market this quarter, and that is where Chesapeake Energy Co. (NASDAQ: CHK) comes into play. First, here’s why Buffett decided to boost his presence in oil.
Buffett's Insight: Spotting the Next Oil Price Supercycle
Recently, OPEC+ announced its commitment to keep cutting oil production rates this year, severely affecting the future trajectory of oil prices per barrel. Earlier this year, analysts at The Goldman Sachs Group Inc. projected oil to range between $70 and $100 per barrel for the rest of 2024.
So far, these analysts have been right on the lower end of their projections, as oil has recently struggled to break above $80. However, as Buffett probably knows, the prospects of the Federal Reserve (the Fed) rate cuts could prove his decision right, as cheaper financing could boost business activity and thus oil demand.
Knowing this, analysts have projected up to 28.5% EPS growth for Occidental Petroleum for the next 12 months, outpacing the lowering rate of economic growth in the U.S. as judged by a lower revised GDP growth rate of only 1.3%.
These same analysts see a valuation of up to $70.9 a share, calling for a 16.7% upside from where the stock trades today. Despite enough upside for these major option traders to make a ‘quick’ buck, here’s where investors can see how the juice is worth the squeeze.
Chesapeake Energy Stock: The Best Growth Play for Potential Oil Price Surge
Outpacing Buffett’s selection comes Chesapeake Energy stock’s EPS projections for up to 435.7% this year. Despite such aggressive projections, some on Wall Street have yet to recognize where this stock’s valuation could end up.
Only those at Stephens saw it fit to slap a valuation of up to $117 a share for Chesapeake Energy stock, calling for a 33.5% upside from where the stock trades today. However, because EPS typically drives stock prices, a 33.5% upside driven from 435.7% EPS growth seems disconnected from its true potential.
Because Chesapeake Energy stock trades up to 95% of its 52-week high, close to its all-time high, investors can partly assume that markets are willing to favor this oil company over Buffett’s choice.
Occidental Petroleum stock trades at only 85% of its 52-week high prices, which still shows a long way to go if the stock wants to reach its all-time high of $117.9 a share set in 2011.
Market Perception Shifts Favorably Toward Chesapeake Over Occidental
Investors can gauge market sentiment toward a stock in two ways, especially when comparing it against a peer or a group. The first is already taken care of, which is EPS growth prospects for the next 12 months; the second is more straightforward.
When markets look to place a value on these future earnings, they use the forward P/E ratio, and whichever stock commands the higher rate is considered to have a more bullish regard from the markets.
It is no wonder that Chesapeake Energy has performed in line with the Energy Sector Select SPDR Fund (NYSEARCA: XLE) over the past 12 months, outperforming Occidental Petroleum stock by as much as 10%.
In the case of Chesapeake’s 16.8x forward P/E, it commands a premium of 39.2% over Occidental’s 12.1x valuation. There is always a good reason for stocks to trade at premium valuations and be near their 52-week or even all-time highs, and this time for Chesapeake Energy; the reasons lie in a commodity upcycle and industry-leading EPS growth.
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3 Stocks with Unusual Call Option Activity and High Buying Volume
When traders decide to bet on stock options rather than lay their capital into buying straight shares, investors must notice two main implications of trading options rather than shares. First, options have an expiration date and a strike price, meaning whoever buys an option needs to get the direction (and magnitude of a move) and the timing right in the trade.
So, when someone buys a call option—meaning they are bullish on the stock—the underlying stock needs to rally to the chosen strike price by the selected date; if these requirements are not met, then the trader will lose 100% of the capital laid out on the expiration date. For this reason, stocks that report unusual option call buying volumes call for investor attention any day.
But today is not any day; today, this options screener caught a volume breakout in stocks like Bank of America Co. (NYSE: BAC), Nike Inc. (NYSE: NKE), and even PayPal Holdings Inc. (NASDAQ: PYPL). Each has its own merits for calling on trader attention, which could make for a potential buying opportunity for those willing to keep an eye out.
Why the Current Interest Rate Environment Favors Bank of America Stock
Financial stocks like Bank of America benefit from interest rate swings, such as the ones proposed by the Federal Reserve (the Fed) today. According to the CME's FedWatch tool, these interest rate cuts are poised to come as soon as September 2024, making the catalyst clear for traders to justify looking into Bank of America stock.
When and if interest rates are cut, the commercial side of the bank will experience additional volume and profits. Mortgage and credit card rates typically come down along with the Fed funds rate.
Because of this, those on the sidelines waiting to buy a home, due to 7.3% and higher mortgage rates today, might have their long-awaited opportunity to finance a new home at better rates.
More than that, these market cycles tend to shift much of the stock market’s sector performance. In simpler terms, this means rising volatility for the overall market, an opportunity for Bank of America’s sales and trading arm to see rising profits based on this volatility.
These trends have pushed analysts at Oppenheimer to boost Bank of America stock’s valuation to $46 a share. The stock would need to rally 18.2% from its current level to prove these analysts right.
Nike Stock Nearing a Bottom with Signs of Consumer Trend Recovery
After four months of disappointing data, the U.S. consumer sentiment index has finally reached a higher reading. Signs of a more optimistic consumer will definitely help consumer discretionary stocks like Nike, which is almost considered a commodity, just like a green Medusa cup from Starbucks Co. (NASDAQ: SBUX).
Now that the stock trades at 78% of its 52-week high, Nike offers investors an opening to become a potential discount value play. Justifying recent call option buying breakouts also comes with analyst views for the stock.
Those at Robert W. Baird see this upside reaching as high as $125 a share for Nike stock, meaning it needs to rally by roughly 30.3% from where it trades today.
More than that, Nike’s price-to-earnings (P/E) ratio of 28.2x is the lowest it has been since 2017 (excluding COVID-19’s collapse). Today’s valuations are another pillar that these options traders may consider to determine whether laying out their capital to be exposed to the stock’s potential upside in the coming months is worthwhile.
Tied to the same trends benefitting Bank of America, Nike’s audience could also benefit from interest rate cuts, as cheaper financing rates and money in the economy will likely stimulate consumer activity.
Reignited Growth Paths Point to Future Upside Potential for PayPal
PayPal doesn’t need to become a growth stock to return to its fair valuation. Still, it doesn’t hurt for management to start exploring new ways to ignite shareholder growth.
Recently, the platform launched a new commerce-based advertising business to spark new revenue avenues for PayPal to expand its top and bottom-line finances. Knowing this, investors may say that today’s earnings per share (EPS) growth projections for 9.9% could be on the conservative end of the spectrum.
The company is also expanding its income stream by creating its own cryptocurrency on the Solana blockchain, which could allow for future seamless transactions and safety features. Of course, this would be an additional fee-based business or something similar.
Willing to prove PayPal’s fair valuation, analysts at Mizuho Financial Group saw fit to boost the stock’s price target to $90 a share. These valuations imply that PayPal’s fair value lies roughly 38% above today’s prices.
Over the past month, PayPal’s short interest has declined by 2.3%, showing that bearish traders are stepping out of the game and avoiding the potential losses that could come with shorting a stock as loaded with upside as PayPal.
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