In early spring, a sudden wave of awe-inducing bank failures rocked the U.S. financial sector. The sequential collapses of Signature Bank, Silicon Valley Bank, and First Republic Bank triggered a panic among depositors and regulators. All of them had to scramble to prevent a systemic contagion.
The crisis was partly facilitated by the U.S. Federal Reserve hiking interest rates quickly. This in turn devalued the treasury bonds-holdings held on the balance sheets of many banks. Ultimately, the crisis also exposed a wider vulnerability of banks that had invested heavily in long-term treasury bonds. Those of which lost value as interest rates rose sharply in response to inflationary pressures.
Now, fast forward nearly six months. The panic felt earlier in the year has largely disappeared from the zeitgeist. Still, this doesn’t represent a lack of short sellers still betting on the collapse of unstable financial institutions. Let’s delve into banks and insurance businesses which are perceived by many short sellers as unstable, but they could possibly pivot, triggering a potential short squeeze.
Trupanion (TRUP)
Trupanion (NASDAQ:TRUP) is a leader in medical insurance for cats and dogs. They operate in the U.S., Canada, Europe, Puerto Rico, and Australia.
The company with the loyal customer base offers a subscription-based model that covers 90% of veterinary costs for pets with no payout limits. Recent financial figures show the insurance company maintains a monthly retention rate over 98% and an average per pet revenue of $64. TRUP also features a vast network of over 20,000 veterinarians who can receive direct payments from Trupanion within seconds.
Trupanion has been growing rapidly, with revenue growth being consecutively above 25% over the past few years. However, years of record top-line growth has not trickled down to the pet insurer’s bottom-line profits. Trupanion’s EBITDA and net income have slipped more into negative territory in both 2021 and 2022.
Similarly, 2023’s quarterly profits have continued the trend. Therefore, the underperforming financials have galvanized a large group of short sellers. The company has a short interest of 23% of its float. This means that nearly one-fourth of its shares available for trading were sold short.
This creates an opportunity for a short squeeze if Trupanion delivers positive results in the coming quarters and surprises the market with its outlook.
Lemonade (LMND)
Another insurer makes the list.
Lemonade (NYSE:LMND) is a digital insurance platform that offers renters, homeowners, car, pet, and life insurance. The company uses artificial intelligence and social impact to provide a fast, easy customer experience and reduce fraud and claims costs. As a way of giving back, Lemonade donates unused premiums to nonprofits selected by its customers during its annual Giveback program.
Lemonade has been expanding its product portfolio and geographic footprint, launching car insurance in 2021 and entering the UK market last October. Furthermore, the insurer acquired Metromile, a pay-per-mile car insurance provider, in July 2022. That adds over $110 million in premiums to its revenue streams. For both the first and second quarters of 2023, Lemonade reported record revenues with astronomic year-over-year growth.
However, Lemonade has also faced significant headwinds from higher loss ratios due to severe weather events and catastrophes. Climate change and the growing severity of weather events have weighed on investors minds lately. Many short sellers have placed bets against the company. Lemonade’s short interest is 21% of its float.
This could set the stage for a short squeeze if Lemonade continues to beat expectations and demonstrate its ability to grow profitably and sustainably.
HomeStreet (HMST)
HomeStreet (NASDAQ:HMST) is a diversified financial services company that provides banking, mortgage and commercial real estate lending, and investment services.
The company operates through two segments. Commercial and consumer banking offers deposit products, loans, cash management services, and wealth management services. Mortgage banking originates and sells single-family residential loans.
HomeStreet has been navigating the challenging interest rate environment by reducing its loan portfolio size. It also increases its deposit base through promotional products and lower cost insured deposits. HMST focuses on floating rate loan products such as commercial loans, residential construction loans, and home equity loans. The company also reported its second quarter 2023 results on July 31st, 2023. That report shows net interest income growth of just over 38% year over year to $60.1 million.
Despite its solid top-line performance, short sellers have specifically targeted HomeStreet. They expect the bank’s net interest margins and earnings to decline as interest rates rise further. As of July 30th, 2023, the company had a short interest of 13% of its float, suggesting that a significant portion of its shares are sold short. Nonetheless, signs that the U.S. Federal Reserve is likely done with rate hikes could trigger a short squeeze as investors become more bullish on bank stocks.
On the date of publication, Tyrik Torres 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.
