With the S&P 500 now up more than 23% this year, some investors are eyeing individual names in the broader benchmark index that look overvalued and might be at risk of correction. These select investors hope to enact a short sale that can help them access outsized profits.
Shorting is a standard practice typically seen on Wall Street when investors or firms borrow shares at a certain price and then immediately sell the borrowed shares in the market. These investors hope the share price drops so they can repurchase the shares for less and then return them to the borrower, pocketing the price difference for themselves as profit. For some, shorting is viewed as a villainous practice. For others, it's considered a healthy part of a free market that prevents valuations from getting too frothy.
Shorting can be risky if not hedged properly. Stocks can, in theory, rise to infinity, so investors who bet wrong can lose their shirts if the stock price keeps going up. Retail investors monitoring their portfolios should take notice if one of their stocks has a big short position against it. Seeing one may suggest they reexamine their thesis on the stock and double-check that they are not missing anything.
Here are the five most shorted stocks in the S&P 500. Most are on this list for good reason, but the bears are wrong about one of them.
1. Super Micro Computer -- 21.25% of float sold short
Super Micro Computer(NASDAQ: SMCI), the designer and manufacturer of computer servers and storage systems, has slightly more than 21% of its available shares sold short -- the highest in the S&P 500, according to StatMuse. Like most great stocks this year, Super Micro has been a huge beneficiary of the artificial intelligence boom. Companies running machine learning and other types of AI models use Super Micro's computers and storage systems for storing the massive quantities of data required to make AI possible. Its stock price is up 66% this year.
However, a firm with a reputation for shorting stocks, Hindenburg Research, issued a short report against Supermicro in August, alleging accounting improprieties that Supermicro says are false or inaccurate. The Securities and Exchange Commission did charge the company with "widespread accounting violations" back in 2018. Super Micro saw its valuation balloon earlier this year to close to 93 times earnings, but it now trades at about 24 times earnings.
2. Day Force -- 15.69% sold short
Close to 16% of the float is being sold short on the cloud-based human resource platform Day Force(NYSE: DAY). The stock is down more than 4% this year. Day Force is a software-as-a-service company that helps companies manage all aspects of human resources, from payroll to benefits to hiring. The company trades at a big valuation of more than 210 times earnings and 35 times forward earnings, well ahead of peers.
DAY PE Ratio data by YCharts.
On a forward earnings basis, the company is much more in line with peers but still at the top of the group. Given the amount of competition in this space, investors are likely wary of Day Force's valuation, even though the company's doing some good things.
3. International Paper -- 15.58%
Paper manufacturer International Paper(NYSE: IP) has more than 15.5% of publicly available shares sold short. The stock is up nearly 30% in 2024, so it's beating the broader market this year. International Paper has been involved in takeover rumors all year, most recently regarding the Brazilian paper company Suzano. This seemed to drive up the share price because the expected offer would have been at a premium to International Paper's stock price when the rumors first hit. But Suzano ended its takeover attempt in June, and the stock price has hung in, possibly due to more favorable market conditions.
Meanwhile, International Paper has been in the process of acquiring DS Smith, a transaction expected to close later this quarter. The deal is expected to result in cost synergies, so perhaps the market likes the idea, but I would have thought the stock would have retreated more after Suzano didn't buy International Paper.
4. Walgreens Boots Alliance -- 15.04%
Shares of the well-known pharmacy chain Walgreens Boots Alliance(NASDAQ: WBA) have tanked slightly more than 60% this year. Brick-and-mortar pharmacies have not fared well due to increasing competition from online players like Amazon and other operational issues like hiring struggles. Walgreens also had to take a $6 billion impairment charge on its controlling stake in VillageMD, which it purchased a few years ago.
Walgreens has seen declining free cash flow, and it also had to cut its dividend in half earlier this year. Recently, the company reported earnings that beat analyst estimates and said it would close 1,200 stores to boost earnings and free cash flow. It could be a turnaround story, but many challenges remain.
5. Aptiv -- 14.37%
Auto technology company Aptiv(NYSE: APTV) rounds out the group, with more than 14% of shares sold short. The stock is down more than 22% this year. Aptiv has struggled because it makes car parts for electric vehicles, which have seen weakening demand and production in 2024. The company has a significant presence in China, which saw its economy hit hard by weak consumer demand and a housing downturn. Aptiv also faces increased competition after Volkswagen and Rivian joined forces to create a new unit that will make software for electric vehicles.
The bears are wrong about...
I would first point out that the bears could be wrong about all five of these companies. That's why two sides make a market. You don't have to write off any of these stocks, but investing in them will require a good amount of research to ensure you are comfortable with buying.
I think the bears are wrong about Aptiv, which now has several tailwinds. Government stimulus in China should help the country rebound, or at least put it in a better position than it has been in. Aptiv also seems to be on decent financial footing, having grown revenue and profits in the second quarter (from the linked quarter) despite the difficult backdrop.
In Q2, Aptiv also announced a new $5 billion share repurchase program, including a $3 billion accelerated repurchase program, showing that management is confident in the stock. Finally, the company's price-to-earnings ratio has been cut in half this year to 5.3, and short interest has begun to come down from highs, so it looks like the bears are starting to get flushed out.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Aptiv, Asana, Paycom Software, Paylocity, Volkswagen, and Workday. The Motley Fool recommends Volkswagen Ag. The Motley Fool has a disclosure policy.
