The surge in stock prices over the 10-year bull market has led many hedge fund managers to take short positions in a select list of stocks, or bet that they will fail, according to Bank of America Merrill Lynch, per Business Insider. Out of the group of highly shorted stocks, most are in the discretionary and technology sectors. BofA’s list includes: Under Armour Inc. (UAA), Advanced Micro Devices Inc. (AMD), Macy’s Inc. (M), Microchip Technology Inc. (MCHP), Coty Inc. (COTY), Discovery Communications Inc. (DISCA) and Nordstrom Inc. (JWN).
The following are hedge fund managers' dozen biggest short bets:
12 Big Shorts
- TripAdvisor; short interest as a % of float: 13
- Campbell Soup Co.; 13%
- Albermarle Corp.; 13%
- Advanced Micro Devices Inc.; 13%
- Coty Inc.; 14%
- Macy’s Inc.; 14%
- Nordstrom Inc.; 15%
- Kohl’s Corp. ; 15%
- Microchip Technology Inc.; 16%
- Discovery Communications Inc.; 18%
- Mattel Inc.; 20%
As market headwinds — including trade tensions, geopolitical uncertainty, slowing economic growth, rising rates and other industry-specific risks — inject a wave of volatility into the market, many investors are circling back into more defensive or value-oriented strategies. Within a rocky market, it’s even more important for investors to shield themselves against potential landmines, or stocks with inflated valuations poised to plummet. BofA’s list of hedge fund shorts may provide insight into stocks that could plunge in the new year.
The hedge funds most heavily shorted companies range across industries from technology to retailing, chemicals, packaged goods and consumer services. The average short position is 13%-15% of float.
Hedge funds themselves suffered through a rough 2018, with the industry posting its biggest losses since 2011, per Bloomberg. According to data from Hedge Fund Research Inc., portfolio values declined 4.1% on a fund-weighted basis last year. While some smaller traders were able to outperform the broader market, in a year which the S&P 500 index posted its weakest performance in a decade, many saw their worst year ever.
The traditional retailers, facing disruption from e-commerce competitors like Amazon.com Inc. (AMZN), has presented losers and winners, based on investors’ confidence in their ability to keep up with industry changes and differentiate themselves against rivals.
Shares of Macy’s have recently outperformed the broader market, up about 20.6% over the past 12 months versus the S&P 500’s 5.9% decline. Despite its comeback, bears warn that the retailer could experience another downdraft as Amazon continues its expansion into brick-and-mortar space with its omni-channel strategy, reeling in Prime members to its hundreds of Whole Foods Market locations and broadening its scope into industries like pharmacy and apparel.
Semiconductor makers have experienced a particularly painful 2019 as analysts become more pessimistic on the myriad of headwinds facing the sector.
AMD, which posted an impressive 83.2% return in 2018, bringing its three-year gain to 700%, is now down roughly 41% from its 52-week high around $34 in September. While AMD bulls had cheered the Santa Clara, California-based company's strides against rivals like Intel Corp. (INTC) and Nvidia Corp. (NVDA), many have started to doubt that the company can continue to keep growth numbers high enough to justify its lofty valuation.
The overall sentiment on the Street now suggests that growth opportunities for chip makers, across industries like machine learning and self-driving cars, is not enough to offset risks. In a note in September, analysts at Goldman Sachs highlighted downside drivers including weakened industry fundamentals, inflated inventories, and the onset of a down cycle for the sector at large, per Investopedia.
As consumers opt for healthier, store-ready alternatives to traditional packaged foods, companies such as Campbell Soup Co. (CPB) have fallen out of favor among hedge funds. In particular, Campbell is disliked among hedge funds, although some bulls remain optimistic about its new CEO Mark Clouse, who most recently led another struggling company, Pinnacle Foods.
Despite the market’s rally, a large number of long stock investors still argue that equities overall are poised to continue to fall. If the forecast is true, hedge fund shorts may do great, reversing funds’ less-than-ideal performance in 2018.