We recently published a list of 10 Best Big-Name Stocks to Buy Right Now According to Short Sellers. In this article, we are going to take a look at where Costco Wholesale Corporation (NASDAQ:COST) stands against the other big name stocks.
In early April 2024, Goldman Sachs Inc.’s data revealed that short selling on individual US-listed stocks was at the highest level in 6 months, and the most targeted sectors were technology, telecom, and media. This increase in short positions was seen after the significant ~9% advance seen in 1Q 2024 for the S&P 500. As per the data, some hedge funds that were using long-short equity strategies have started to fight the rally.
During extreme market volatility, short selling has become pronounced and has drawn significant interest from institutional and retail investors. It has prompted regulatory intervention as new reporting requirements have been issued by the SEC to offer transparency and ensure the availability of short position data.
Recent Trends in Short Selling
In the 2Q 2024, the US and Canadian markets saw an increase of ~$58 billion in short interest or a rise of 5.1% from the previous quarter.
Recently, S3 Partners, a renowned tracker of short-interest data, reported that the sectors that saw the largest increases in short exposure in 2Q 2024 included information technology (a rise of $49.3 billion), communication services (at $11.2 billion), and utilities (a rise of $3.7 billion) from the previous quarter. The sectors that saw the largest decrease in short exposure were the energy and financial sectors, down $12.3 billion and $1.6 billion, respectively.
Earlier in 2024, a significant surge in the leading AI giant resulted in losses of ~$3 billion for the short sellers. Some market experts even described this as an “AI-generated nightmare.”
In global equities, short interest climbed during July 2024, with strong increases seen throughout the Automobile (+13bps), REITs (+11bps), and Consumer Durables (+11bps) sectors, reported S&P Global. On the other hand, the largest decreases were in the Financial Services (-10bps) and Real Estate Management and Development (-4bps) sectors.
Talking about the US equities, the average short interest decreased to 77 basis points during July 2024. Significant increases in short interest were seen throughout REITs (+6 basis points) and the Household and Personal Products (+8 basis points) sectors. Conversely, the largest declines were in the Financial Services (-15 basis points) and the Automobile (-9 basis points) sectors.
Heavily Shorted Stocks Might Not Always Be in Distress, Says S3 Partners
S3 Partners revealed that there is a relatively weak correlation between short positions in certain assets and distress measures. This means that not all heavily shorted stocks are facing difficulties. As per the firm, broader market sentiments and valuation concerns are some of the factors that can drive short interest.
The company believes that shorting an asset can form part of broader strategies or hedging activities not linked to distress. It mentioned that there can be 3 measures of bearishness for stocks —- average analyst ratings (From 1 to 5), Credit default swap (CDS) spreads, and Altman Z-Score.
For example, the US Dollar had a low short position of ~1.32%. However, it had a high CDS spread of 1000 basis points. This indicates high perceived distress on the currency even though there is minimal short interest. This can be because of factors such as currency market dynamics or investor sentiments.
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A customer in a warehouse aisles, browsing the wide range of branded and private-label products.
Costco Wholesale Corporation (NASDAQ:COST)
Number of Hedge Fund Holders: 71
Short % of Shares Outstanding (August 15, 2024): 1.54%
Costco Wholesale Corporation (NASDAQ:COST) is a membership warehouse club. It sells all kinds of food, automotive supplies, toys, hardware, sporting goods, and apparel, among other goods.
Costco Wholesale Corporation (NASDAQ:COST) is expected to have strong revenue and earnings for the upcoming years due to its cost advantage, scale, and membership program. The company provides fewer products as compared to other retailers, simplifying supply chain logistics and procurement. Costco Wholesale Corporation (NASDAQ:COST)’s attractive product assortment and low prices should continue to act as growth enablers. These advantages can also help in driving strong traffic through its warehouses.
Apart from these facts, the company’s vast scale and merchandising strategy provide a significant cost advantage in the crowded retail environment. Recently, Costco Wholesale Corporation (NASDAQ:COST) announced its first membership fee hike in nearly 7 years. This price rise has now become effective. The change should result in a significant earnings boost for the company. It also revealed that this will impact ~52 million paid memberships.
The company released 3Q 2024 financial results. Its net sales for the quarter went up by 9.1% to $57.39 billion from $52.60 billion last year. Net sales were positively impacted by approximately 0.5% to 1.0% from the shift of the fiscal calendar, due to the fifty-third week last year. Overall, its results were characterized by the expansion of its digital initiatives and the success of its curated marketplace, Costco Next, together with a healthy increase in membership fee income.
Robert W. Baird upped their target price on the shares of Costco Wholesale Corporation (NASDAQ:COST) from $850.00 to $975.00, giving it an “Outperform” rating on 11th July. As per Insider Monkey’s 2Q 2024 database, 71 hedge funds reported owning stakes in the company.
ClearBridge Investments, an investment management company, released its second quarter 2024 investor letter. Here is what the fund said:
“Consumer staples holdings were also standouts in the quarter, such as Costco Wholesale Corporation (NASDAQ:COST), which continues to execute well and delivered better than expected earnings, helped by strong traffic driving better expense leverage. Customers also looked to be shifting toward more discretionary purchases.”
Overall COST ranks 9th on our list of the best big name stocks to buy according to short sellers. While we acknowledge the potential of COST as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than COST but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
