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Nvidia stock is at risk of being sold short, according to 22V Research.
Time to dream
Shares have rallied in recent months, with the
S&P 500
gaining around 16% from its low point in October, but some of the market’s top performers may now be at risk of short-selling.
The Federal Reserve raised interest rates to cool record inflation by reducing economic demand. Now, inflation is easing and markets are optimistic that the Fed could halt its rate hikes soon, although Friday’s stronger-than-expected jobs report will throw cold water on that narrative.
Some stocks soared during the rally, particularly those in technology and cyclical or economically sensitive sectors.
Now, 22V Research has put together a list of candidates who could be shorted or bet against. This happens when a trader borrows someone else’s shares, sells them immediately, and usually buys them back within a six-month period to pay them back. The hope for the short seller is that the price will fall, creating a profitable trade.
The firm picked the top five performing stocks in every S&P 500 sector over the past month, many of which also beat the index from its October low. Many “will likely see reversals in February,” wrote 22V Research’s Dennis DeBusschere.
Nvidia
The stock (ticker: NVDA) is up 90% since the start of the rally. Its valuation, or multiple of expected earnings per share for next year, is up about 50 times from about 30 times at the start of the rally, making it vulnerable to potentially higher interest rates. Higher rates reduce the value of future profits, and Nvidia is valued on the basis that most of its profits will come many years into the future. Meanwhile, the stock’s short interest is low: Only about 1.5% of outstanding shares are short, according to S3 Partners, lower than the S&P 500’s 2.4% overall. that’s plenty of room to shorten it, if something goes wrong. The company’s Feb. 22 earnings report may fall short of the stock’s high price, for one.
Micron technology
(MU) is up about 20% since the rally and more since the stock’s nadir in September. It is trading at a growth-like multiple, at 23 times projected EPS for 2024, a few points above the S&P 500 multiple and up since the start of the rally. The company reports earnings in March, but there is room for short sellers, with short interest at 2.6%.
Shares of Nucor (NUE) rose 54%, but the steelmaker is economically very sensitive as it sells less steel and at a lower price as demand for steel-based products such as cars wanes. His short interest is around 2.5%.
Peer Steel Dynamics (STLD) saw its stock gain 69%, with short interest around 3%. Both of these steel companies saw earnings-per-share estimates fall during the rally.
Diamondback energy
(FANG) is on the list. Admittedly, it was flat during the October rally, but is still up 26% from its September low. Short interest is still only about 3.9% and the problem for oil companies is that oil prices fell during the rally and analysts expect EPS for most oil companies including Diamondback , will go down in each of the next two years .
Oil Marathon
(MPC) has seen its stock gain 40% from its September low. The short interest is only 2.5%.
None of this necessarily means that these stocks will go short, just that there is a particularly high risk of that happening. Be careful with these names.
Email Jacob Sonenshine at [email protected]
