The best thing about the stock market is that you can make money in either direction. Historically, stock indexes have tended to trend up over the long term. But when you look at individual stocks, you’ll find plenty that lose money over the long haul. According to hedge fund institution Blackstar Funds, even with dividends included, between 1983 and 2006, 64% of stocks underperformed the Russell 3000, a broad-scope market index.
A large influx of short sellers shouldn’t be a condemning factor for any company, but it could be a red flag from traders that something may not be as cut-and-dried as it appears. Let’s look at three companies that have seen a rapid increase in the number of shares sold short and see whether traders are blowing smoke or if their worry has some merit.
| Company | Short Increase July 15 to July 31 | Short Shares as a % of Float |
|---|---|---|
| Advanced Micro Devices, Inc. (NYSE:AMD) | 30.2% | 20% |
| iShares Dow Jones US Home Const. (ETF) (NYSEARCA:ITB) | 77% | N/A |
| Gold Fields Limited (ADR) (NYSE:GFI) | 52.7% | 0.8% |
Source: The Wall Street Journal, N/A = ETFs do not have a fixed number of shares in their float.
Things are getting chippy
Advanced Micro Devices, Inc. (NYSE:AMD) almost looked as if it wouldn’t make it to the end of 2013 at this time last year, but it’s beginning to put some of those naysayers at bay. I admit that for a very long time I was quite pessimistic on AMD given its inferior position to Intel Corporation (NASDAQ:INTC) in microprocessors with regard to market share (Intel maintains 85% of market share in microprocessors) and when comparing both companies’ cash flow, where Intel is able to make considerably larger investments in R&D and reward shareholders with a 4% yield. But the tide is changing…
The real exciting news as of Advanced Micro Devices, Inc. (NYSE:AMD)’s latest quarterly results is that it anticipates being profitable again next quarter thanks to stringent cost-cutting and new products driving graphic solutions growth. AMD is by no means as cheap as it appeared last year, but it’s not a company I would consider betting against with the heart of its turnaround beginning to take shape.
This is a problem…
Talk about an odd divergence that should certainly have homebuilding investors on edge. In the latest U.S. housing data, we saw a widening divergence between positive data, such as the National Association of Homebuilders Index, which hit a nearly eight-year high, and negative data like new home sales, which hit a nine-month low and fell 13.4% to an annually adjusted rate of 394,000. Which one tells the real story? I believe the answer lies in the current interest rates.
Since early May, lending rates have been on a steady incline and now stand more than 100 basis points off their lowest levels. While still historically low by all standards, consumers have become spoiled by low interest rates and quickly shied away from this “dramatic” rise in rates. Since May, mortgage originations have fallen by more than 50%. The housing industry is counting on low lending rates to drive continued expansion. If the Federal Reserve does choose to end its monetary easing program known as QE3, I feel there’s a strong possibility that lending rates will normalize at even higher levels, which would pose a serious problem to future growth in the homebuilding sector.
Another worrisome factor for the Dow Jones U.S. Home Construction ETF is its holdings, which have large weightings in what I consider some very questionable homebuilders. Now, I’m not talking about Lennar Corporation (NYSE:LEN) or D.R. Horton, Inc. (NYSE:DHI), which have done a marvelous job of managing their margins and inventory. Instead, I’m talking about approximately 10% of this ETF’s holdings in PulteGroup, Inc. (NYSE:PHM) and another 8% in Toll Brothers Inc (NYSE:TOL), which have both been more of an adventure than an investment over the past decade. PulteGroup, for instance, saw net new orders for the second quarter actually fall 12% and has been profitable on an annual basis only once over the past six years.
To me, this looks like an ETF that certainly deserves some attention by short sellers.
Costs are a concern
Mining stocks have definitely taken it on the chin in 2013 as global commodity prices have tanked and labor costs have jumped. No miners have seen this to a greater extent than Africa-based gold miners like Gold Fields Limited (ADR) (NYSE:GFI). Although Gold Fields does have operations in Peru and Australia, it’s the company’s mining costs in Ghana and South Africa that are crushing its margins.
