Short 'squeeze' may prompt Sears to surge, Credit Suisse
Sears Holdings Corp., the sixth worst-performing stock in the Standard & Poor's 500 Index during the past six months, may surge with other heavily shorted companies should a rally prompt bearish investors to cover their bets, according to Credit Suisse Group AG.
Undervalued stocks with high short interest such as Hoffman Estates-based Sears and Best Buy Co., the world's largest consumer-electronics retailer, could outperform in the near-term if the market rallies because investors who bet against them will be forced to buy the securities to cover their positions, Credit Suisse analyst Pankaj N. Patel wrote in a note yesterday.
"If the market picks up in the coming weeks, the most heavily shorted stocks may rise in response to a short squeeze," wrote Patel, who is based in New York. "Over the long term, we view high short interest as a negative indicator, with the highest short interest stocks underperforming over time. However, there is possibility of short covering when the market rises unexpectedly."
Short sellers borrow stocks and sell them in the hope of profiting by repurchasing the securities later at a lower price and returning them to the holder. Short covering occurs when an investor buys a security to close a short position or to return a borrowed security. In a short squeeze, the lack of supply forces prices upward and traders with short positions are forced to buy the securities to cover their positions and limit their losses. The surge of buying results in even higher prices.
Most-Shorted StocksSears, which is based in Hoffman Estates, Illinois, has fallen 36 percent in the past six months. More than 25 percent of the company's shares available for trading, or float, were sold short as of June 30, according to data compiled by Bloomberg. That makes it the second most-shorted stock in the benchmark index for U.S. equities.Credit Suisse economists say there is no chance the U.S. economy will fall into its second recession in three years, indicating that investor fear of further declines in the stock market isn't justified. The SP 500 has rebounded 7.2 percent from a 10-month low on July 2 amid optimism about second-quarter results. Analysts predict earnings in the SP 500 grew 34 percent last quarter, according to Bloomberg data.The VIX, as the Chicago Board Options Exchange Volatility Index is known, reached a closing high this year of 45.79 on May 20 as an increase in U.S. jobless claims and the European credit crisis caused concern among investors. The index measures the cost of using options as insurance against SP 500 declines."This high level of fear seems unwarranted, especially considering the positive indicators present in the current macro environment," Patel wrote.'Unloved'The Zurich-based bank used high short interest, negative analyst ratings, positive earnings guidance and cheap valuations to pick "the most unloved and undervalued" stocks that are likely to "outperform in the near-term as fear indicators return to more normalized levels and markets advance," according to the report.The list of stocks selected include Lexmark International Inc., the second-largest U.S. printer maker, for-profit educator Corinthian Colleges Inc. and Reynolds American Inc., the second- largest U.S. tobacco company.Sears stock is more difficult to borrow than the majority of stocks in the SP 500, according to Credit Suisse, which added that harder-to-borrow stocks have a higher chance of a short squeeze.