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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Is Amazon.com, Inc. (AMZN) The Best Big-Name Stock to Buy Right Now According to Short Sellers?
A customer entering an internet retail store, illustrating the convenience of online shopping.
Short % of Shares Outstanding (August 15, 2024): 0.77%
Amazon.com, Inc. (NASDAQ:AMZN) is an online retailer, offering a wide range of products. Its products include books, music, computers, and numerous other products. The company also operates a cloud platform offering services globally.
The company’s Prime business, together with its e-commerce efforts, offers a steady stream of high-margin recurring revenue from the customers purchasing more frequently from its properties. Given its leadership position in cloud infrastructure, AWS provides crucial services throughout industries. As more and more businesses adopt cloud-based solutions, AWS seems to be well-placed to capture a significant share in this high-growth market.
Amazon.com, Inc. (NASDAQ:AMZN) should also benefit from the expected rate cuts by the US Federal Reserve. Even the slightest reduction in borrowing costs should support the consumer purchasing power. Therefore, the rate cuts can act as a growth catalyst for Amazon.com, Inc. (NASDAQ:AMZN)’s e-commerce segment.
Moreover, the company is well-placed for long-term growth given its network effects, cost advantages, intangible assets, and switching costs. While Amazon.com, Inc. (NASDAQ:AMZN)’s business has intangible assets related to technology and branding, the company also has a cost advantage that is tied to purchasing power, logistics, and vertical integration.
Insider Monkey’s 2Q 2024 data revealed that 308 hedge funds held stakes in Amazon.com, Inc. (NASDAQ:AMZN), up from 302 in the preceding quarter.
Diamond Hill Capital, an investment management company, released its second-quarter 2024 investor letter and mentioned Amazon.com, Inc. (NASDAQ:AMZN). Here is what the fund said
“Among our top individual contributors in Q2 were Amazon.com, Inc. (NASDAQ:AMZN), Texas Instruments and Mr. Cooper Group. Internet retail and cloud infrastructure company Amazon is benefiting from strong profitability, particularly in its Amazon Web Services (AWS) business. Shares also received a boost amid growing optimism around the demand for AWS as Amazon customers’ investments in generative AI projects continue growing.”
Overall AMZN ranks 2nd on our list of the best big name stocks to buy according to short sellers. While we acknowledge the potential of AMZN 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 AMZN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.