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Nvidia and 5 Other Stocks at High Risk for Short Selling

Nvidia shares are at risk of being shorted, according to 22V Research.

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Stocks have rallied in recent months, with the
S&P 500
gaining about 16% since its low point in October, but some of the market’s best performers could now be at risk of short selling.

The Federal Reserve has been lifting interest rates in order to cool record-high inflation by reducing economic demand. Now, inflation is declining and markets are optimistic the Fed could stop its rate hikes soon—even if Friday’s stronger-than-expected jobs report throws some cold water on that narrative. 

Select stocks have soared during the rally, particularly those in the technology and cyclical, or economically-sensitive, sectors.

Now, 22V Research has put together a list of candidates that could be shorted, or bet against. That happens when a trader borrows someone else’s shares, immediately sells them, and buys them back usually within a six-month period to return them. The hope for the short seller is that the price goes down, making for a profitable trade. 

The firm screened for the top five performing stocks in each S&P 500 sector in the past month, many of which have also beaten the index since its October low. Many are “likely to see reversals in February,” wrote 22V Research’s Dennis DeBusschere. 

stock (ticker: NVDA) has gained 90% since the start of the rally. Its valuation, or multiple of next year’s expected earnings per share, has risen to around 50 times from about 30 times at the start of the rally, making it vulnerable to potentially higher interest rates. The higher rates reduces the value of future profits—and Nvidia is valued on the basis that a bulk of its profits will come many years in the future. Meanwhile, the stock’s short interest is low—only about 1.5% of the shares outstanding are shorted, according to S3 Partners, lower than the S&P 500’s aggregate 2.4%. With potential downside, there is plenty of room to short it—if anything goes wrong. The company’s Feb. 22 earnings report could fail to live up to the stock’s lofty price, for one.

Micron Technology
(MU) is up about 20% since the rally and more than that since the stock’s own low point in September. It trades at a growth-like multiple, at 23 times expected 2024 EPS, a few points above the S&P 500’s multiple and up from the start of the rally. The company reports earnings in March, but there is room for short-sellers to come in, with short interest at 2.6%. 

Nucor (NUE) stock is up 54%, but the steelmaker is highly economically sensitive, as it sells less—and lower-priced—steel when demand for steel-based products such as cars declines. Its short interest is at about 2.5%. 

Peer Steel Dynamics (STLD) has seen its stock gain 69%, with short interest at about 3%. Both of these steel companies have seen earnings per share estimates drop during the rally. 

Diamondback Energy
(FANG) is on the list. To be sure, it was flat during the October rally, but it is still up 26% from its September low point. Short interest is still only at about 3.9%, and the problem for oil companies is that the price of oil has dropped during the rally, and analysts expect EPS for most oil firms, including Diamondback, to drop in each of the next couple of years. 

Marathon Petroleum
(MPC) has seen its stock gain 40% from a September low point. Short interest is at just 2.5%. 

None of this necessarily means these stocks will get shorted, just that there is particularly high risk of that happening. Be careful with these names. 

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

Credit: marketwatch.com

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