The stock market has been surging lately. And, in conjunction, stocks at risk of short selling are also rising as traders look to take advantage of overpriced securities. These three high short interest stocks are ones to avoid. Oftentimes, traders look at short interest as a bullish signal, as it could lead to a squeeze. And that’s true in some cases. However, frequently, short sellers have a good reason for betting against a company. Particularly in a frothy market like this one, it says something when short sellers show such heavy conviction betting against companies. In the case of these particular firms, traders should expect sharp declines from these stocks at risk of short selling.
On Semiconductor (ON)
Thinking of highly valued stocks where people are betting against the market, it’d be easy to pick on the AI-driven semiconductor names such as Nvidia (NASDAQ:NVDA). Nvidia shares have run up dramatically in 2023, and appear to be richly valued. That said, even if you think it’s a bubble, it’s dangerous shorting bubbles.
I’d argue that some of the second-tier chip names are much more compelling short sale opportunities. Take, for example, On Semiconductor (NASDAQ:ON). It is a leader in silicon carbide production for the auto industry and derives the majority of its revenues from the vehicles market.
The clear upside here is from electric vehicles, which require much more semiconductor content per unit as opposed to traditional gas-powered designs. That said, electric vehicles are a steady growth market, not an exponential growth one. ON itself is forecasting roughly 11% annualized revenue growth over the next five years, which is good, but hardly revolutionary.
Despite that, ON stock has skyrocketed from $25 at the start of the pandemic to $88 per share today. That’s a massive move that has likely run far ahead of fundamentals. Not surprisingly, On now has one of the highest short interest ratios in the semiconductor space. Any weakness in the economy could see ON and other stocks at risk of short selling tumbling.
Royal Caribbean Cruises (RCL)
Royal Caribbean Cruises (NYSE:RCL) is one of the world’s largest cruise ship operators. Shares plunged at the onset of the pandemic, understandably, as voyages were halted to slow the spread of the virus. RCL stock became a popular pandemic reopening play, and with good reason. It was inevitable that the cruise ships would reopen once again, and things did indeed largely recover for the industry.
However, traders have taken things entirely out of proportion now. At $98 per share, Royal Caribbean is still trading slightly below pre-pandemic prices. So, what’s the issue?
The problem is that the company took on loads of new debt and issued shares to survive the pandemic. As a result, the total enterprise value of the company, its market capitalization plus net debt, is now $45 billion. That’s far in excess of the $35 billion of enterprise value where Royal Caribbean was priced in 2019.
To summarize, investors are now ascribing an additional $10 billion in value to post-pandemic Royal Caribbean as opposed to where it was in 2019. That’s even as Royal Caribbean’s profitability is way down thanks to the extra debtload and much higher interest rates it must pay on its obligations today.
AMC Entertainment (AMC)
AMC Entertainment (NYSE:AMC) stock sold off recently. That comes on news that events are proceeding to cause the conversion of the company’s AMC Preferred Equity Units (NYSE:APE) shares into AMC stock.
This is a short-term negative for the price of AMC stock, as APE and AMC shares should converge in price as the conversion date approaches. As APE stock is currently selling for less than $2 per share, this suggests dramatic additional downside for AMC.
In the bigger picture, while movie attendance has rebounded from the worst levels, it is still well short of the pre-pandemic heights. The rise of streaming services has seemingly eaten away at some portion of the market. Also, recall that AMC was unprofitable in 2017 and 2019 while eking out a tiny profit in 2018.
In other words, AMC was barely making do in a pre-COVID world. Now, with less movie attendance and a much large debtload to worry about, it’s unclear what path AMC has to a potential turnaround. The APE conversion is a short-term negative catalyst for AMC stock. And in the bigger picture, the outlook is bleak given the firm’s structural unprofitability and the weak outlook for its industry.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
