Short selling, also known as ‘shorting’ or ‘going short’, aims to benefit from falling share prices. It’s an advanced strategy that should only be attempted by experienced investors.
That’s because short selling is very risky. In theory, share prices can rise to unlimited levels, meaning a short seller’s losses can be unlimited.
When a company has a large short position against it, it could indicate that there’s an issue at the company. That can be for a wide variety of reasons like a large amount of debt to repay, the group’s underperforming, or there’s been a scandal involving the company.
But despite there being a short position against a company, that doesn’t mean there’s no investment case. Short sellers can get it wrong too.
If a company can make it through whatever issue attracted the short sellers, there’s potential for a revaluation upwards. Sometimes the potential ‘issue’ might not even play out or be as bad as initially expected.
Take Tesla for example – back in 2018, more than 25% of its shares were sold short, with this short position valued at around $10.7bn. But since then, Tesla’s valuation has increased by more than 800%.
With that in mind, here’s a look at some of the larger companies with a high percentage of their stock currently sold short – seeing if there’s any hidden value among some of the more unloved stocks out there.
This article isn’t personal advice. If you’re not sure if an investment is right for you seek advice. Investments and any income they produce can fall as well as rise in value so you could get back less than you invest. Past performance isn’t a guide to the future.
Investing in individual companies isn't right for everyone. They’re higher risk, and your investment depends on the fate of that company. If that company fails, you risk losing your whole investment. If you can’t afford to lose your investment, investing in a single company might not be right for you. You should make sure you understand the companies you're investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
Carnival
Carnival’s inclusion on this list might not come as a complete surprise. The cruise company was severely hamstrung by the pandemic. Cruise ships come with very high fixed costs, which must be paid whether they leave the port or not. And if the ships don’t sail, the revenue streams dry up – making it hard to pay off debts.
As things stand, debt is weighing down the balance sheet. The net debt position currently stands at $30.5bn, which is around 2.5 times Carnival’s total market value. Meaning that for now, it’s very much debt holders that influence Carnival’s course.
But Carnival’s doing everything it can to bounce back from the nightmare that was the pandemic. The move towards larger, newer, and more efficient ships should give margins a push in the right direction as passenger numbers continue to recover.
A recent uptick in passenger numbers meant revenues in the first quarter of 2023 were back to 95% of pre-pandemic levels, coming in at $4.4bn. And record bookings have given management the confidence to promise full ships in the key summer season, as well as positive underlying free cash flows for the full year.
Carnival’s well placed to have a good year, but it needs to have a few in a row to make a dent in its debt pile. And with consumers’ incomes being stretched by a cost-of-living crisis, that could still be a big ask.
While net debt’s 7.6 times this year’s underlying cash profit (EBITDA) guidance of $4bn, the risk of default on debt repayments is higher than we’re comfortable with. That’s somewhat reflected in the valuation, which is some way below its long-term average on a price-to-sales basis.
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Occidental Petroleum
Occidental’s a large oil and gas producer, with its operations spread across the US, Middle East and North Africa. Its primary focus is exploring for and producing oil and natural gas, which helped the group bring in $37.1bn in revenue during 2022.
Back in 2019, Occidental (Oxy) loaded up on debt as part of the $57bn acquisition of Anadarko Petroleum. Part of this deal was financed by Warren Buffett’s Berkshire Hathaway, which received an equity stake in Oxy in return for its cash injection. Since then, Berkshire has grown its stake and now owns just under 25% of the company.
The Anadarko deal left the company with a lot of debt at an inopportune moment – right before the pandemic sent oil prices spiraling downwards. This made it difficult to repay debts and the dividend was slashed to free up cash. To steady the ship, the group was forced to cut back spending, sell assets and streamline processes.
Oil prices have since recovered. Coupled with incredible margins, which are among the best in its peer group, Oxy has been able to significantly reduce its net debt to a more sustainable level. And shareholders are now benefiting from share buybacks and a growing dividend – but remember, shareholder returns are never guaranteed.
Dividends vs share buybacks – what investors need to know
Record free cash flows and net income of $12.5bn in 2022 are part of the reason why Occidental’s currently trading at high valuations compared to its peers.
The Oxy Low Carbon Ventures (OLCV) is another potential avenue for growth. There are plans to build between 70 and 135 carbon capture facilities and sell the associated CO2 tax credits – potentially boosting the bottom line from another ‘greener’ angle.
But ultimately, Occidental’s fortunes will correlate closely to the prices it obtains for its products, particularly oil, which is determined by forces outside of the group’s control. Not least of these is the economic outlook, where recessionary fears remain a very real threat to demand.
The author holds shares in Occidental Petroleum.
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Paramount Global
Paramount Global is a media, streaming and entertainment company, with an extensive list of brands that includes CBS, Comedy Central and MTV to name a few.
The group’s global multiplatform strategy has the potential to give it an edge against some of the more one-dimensional competitors out there. This might be a factor in why Warren Buffett’s Berkshire Hathaway decided to buy a stake in the group – Berkshire currently own around 15% of Paramount.
There’s been significant investment in digital and streaming platforms in recent years, with the launch and expansion of the group’s own streaming service, Paramount+. Growth in this direct-to-consumer service helped group revenue edge up from $28.6bn to $30.2bn in 2022.
When it comes to attracting and keeping customers in this space, content is king. Thanks to a huge film catalogue, as well as recent blockbusters like Top Gun: Maverick, Paramount has plenty of pulling power. Add to the mix it’s also got rights to broadcast an array of live sports games, it’s no wonder Paramount+ subscribers have been growing.
But entertainment is a competitive industry. Paramount+ is facing stiff competition from the likes of Netflix and Disney, who are also flexing their muscles in the streaming space. Making and delivering new content isn’t cheap, and there’s always the worry that some content won’t perform as well as expected, which would hurt margins.
Profitability’s already a worry for Paramount, who saw its net profit margin fall from 8% to 3.9% in 2022. And things on the bottom line are likely to get worse before they get better. But the group’s hoping to return to earnings growth in 2024. Whether this happens remains to be seen.
Overall, we think Paramount has a strong position within the industry. But the thin profit margin doesn’t leave much wiggle room if economic conditions deteriorate further. This risk is reflected by a price-to-sales valuation well below the long-term average.
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Unless otherwise stated, estimates are a consensus of analyst forecasts provided by Refinitiv. These estimates aren’t a reliable indicator of future performance. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.