Contrary Trio: Are the Shorts Wrong?

07/18/2015 9:00 am EST


To assess stocks at Schaeffer Investment Research, analyst Karee Venema considers technical, fundamental, and sentiment based metrics. Here's a look at three contrarian ideas, where short sellers might be proven wrong.

Short sellers have been piling into the equities market, and according to Bloomberg, increased their exposure in June to the highest levels since the financial crisis.

Among specific S&P 500 Index components that have seen sharp rises in short interest in recent months are biopharmaceutical specialist AbbVie (ABBV), fertilizer firm CF Industries Holdings (CF), and pharmacy benefits manager Express Scripts Holding Company (ESRX).

What's interesting, though, is each of these stocks has been gaining ground in the midst of this selling pressure, speaking volumes to their underlying strength.

Short interest on ABBV, for example, is up almost 280% over the past three months, a time frame in which the security has outperformed the broader SPX by nearly 11 percentage points.

What's more, the shares have rallied 25% since taking a sharp bounce off their 320-day moving average in early April and thanks to last Thursday's 1.3% pop that has ABBV lingering near $70.45, the stock is within striking distance of its December 8 all time high of $70.76.

Should the shares extend this momentum, a round of short-covering could help fuel the fire. In fact, at ABBV's average daily pace of trading, it would take nearly nine sessions to cover the 77.4 million shares shorted on the stock. 

AbbVie, Inc. could also be primed for a round of price-target hikes. The consensus 12-month price target of $74 stands at a slim 5% premium to current trading levels.

CF Industries topped out at an all-time peak of $65.75 on July 1 and has since been seen trading near $62.79. Longer-term, the equity has added 29% over the last 12 months and has outpaced the broader SPX by roughly 6 percentage points in the past 60 sessions.

Short sellers have been targeting the stock en masse, though, and over the last three months, short interest shot up 18.2% and increased nearly fivefold in the latest reporting period alone. 

Analysts are unconvinced of the equity's ability to sustain this momentum, too, and 58.3% of those covering the shares maintain a hold or worse recommendation. A capitulation from either short sellers or the brokerage bunch could translate into tailwinds for CF Industries Holdings.

Meanwhile, Evercore ISI raised its price target on Express Scripts to $92 from $91 overnight, sending the shares 0.4% higher to trade at $91.45.

This only echoes the equity's longer-term trajectory, with the stock boasting a 34.3% year-over-year lead and notching a record high of $92.46 as recently as June 22.

Nevertheless, short interest jumped 321% in the last three months and is now lingering near levels not seen since April 2012.

What's more, it would take 18 sessions to cover all these shorted shares, at ESRX's average daily pace of trading, meaning there's plenty of sideline cash available to help buoy the shares.

Additionally, another price-target boost could benefit Express Scripts Holding Company, considering the consensus 12-month price target of $95.55 stands at a slim 4.5% premium to current trading levels.

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