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Thursday, August 6, 2009 - 11:31
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Wednesday, June 26, 2013 - 09:46
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Thursday, August 6, 2009 - 11:31

Do You Own One of the 10 Most-Hated Stocks On Wall Street?

Thursday, August 06, 2009 11:31 AM

Wall Street bets on companies by buying their stock. It bets against them by shorting their shares.

A short seller borrows shares, sells them and waits for the price to go down. When it does, the shares are repurchased at a lower price than they were sold for. The trader pockets the difference and returns the borrowed shares.

Everything in the financial world can be measured, and short selling is no different. The "short ratio" is calculated by dividing the number of shares that have been shorted by the stock's average daily trading volume. The short ratio is the number of days it would take for all the investors who have shorted the shares to buy back or "cover" their short positions. The higher the ratio, the more the market expects the stock to tumble.

The average short ratio for an S&P 500 company is 3.4, which means it would take four trading days for all the short positions to be closed.

Here are the S&P stocks with the highest short ratios:

Buffalo, N.Y.-based M&T Bank (NYSE: MTB) has $63.6 billion in assets but a low Tier 1 capital ratio of 7.5%. Shares have gained nearly 3% for the year, about a fourth of what the S&P has managed, and Wall Street is expecting more trouble. The bank has the highest short-interest ratio in the S&P 500. Among its major shareholders: Warren Buffett's Berkshire Hathaway (NYSE: BRK-A), with a 6.1% stake worth $400 million.

The New York Times Co. (NYSE: NYT) has seen its shares gain 75% in the past six months, a run-up that investors are betting the stock just can't sustain. The iconic newspaper's circulation remains well above 1 million copies a day, but other properties are struggling. Overall spending on newspaper advertising is projected to drop 18.7% this year.

Quarterly earnings at Quest Diagnostics (NYSE: DGX) surprised Wall Street, coming in above expectations. Three executives clearly voiced their own expectations for the stock, too: They all exercised options to buy shares, then resold them for an $11 million profit. When executives -- including the CEO -- aren't willing to keep their wealth tied up in the stock, it's hard to make a case for an exceedingly bright future for the shares.

Iron Mountain (NYSE: IRM) protects information and stores documents. Its revenue isn't growing particularly fast, and the net margin isn't anything to write home about. And yet the shares are trading at nearly 50 times earnings and are within shouting distance of a 52-week high. Investors are betting that these shares really aren't twice as valuable as Apple's. Good bet.

Sears Holdings (Nasdaq: SHLD) ought to be chopping tall cotton: Surely shoppers are drawn to the store for its low prices, right? Wrong. The company, which also includes Kmart, has seen revenue drop for the past two years and earnings diminish to the point where they are nearly invisible to the naked eye (a $1.5 billion profit in 2006 has shrunk to $53 million). It's curious why the shares are up 80% for the year versus the S&P's 11.3% gain.

Leggett & Platt (NYSE: LEG) makes furniture materials and automotive components, both tough businesses in a down economy. As the economy has spiraled downward, Leggett's ability to produce revenue has waned, and profits have been uncertain. Profit fell more than -50% in the second quarter, and the company has cut its expectations for the year and seen its shares downgraded by analysts. That makes LEG stock, trading at a richer valuation than either Apple or Google, a very tempting short.

The trash business, my dad is fond of saying, is picking up. So is the future for Waste Management (NYSE: WMI) as far as I can tell. It's the incumbent trash hauler in scores of cities. Earnings have been on the rise the past few years and it's trading at a reasonable valuation. The company is buying back shares, which it sees as undervalued. This begs the question of what happens to a short seller if a stock goes up instead of down? Answer: He loses money by being forced to buy back the shares he borrowed at a higher price than he sold for.

Mylan (NYSE: MYL) is a drug maker with a history of major revenue growth but troublesome execution evidenced by inconsistent profits. Net losses of $1.3 billion for the past two years substantially overshadowed the $400 million in profits in the previous two years. In the mean time, its debt has increased +612%. Mylan's new president and chief operating officer may be causing some investors to bet the new leadership won't be able to hang onto the stock's +40% gain since Jan. 1.

AutoNation (NYSE: AN) shares have seen a scorching advance since Jan. 1, rising nearly +100%. With the auto business on life support and the economy still soft, it's clear that many on Wall Street don't think the Cash for Clunkers program can heal the industry. Shorts are skeptics: They don't see any reason to pay 22 times earnings for a company that has traded at roughly half that valuation for the past two years.

CMS Energy (NYSE: CMS) is a utility in Michigan. It's another example of a company that has seen some gains that investors apparently don't think it will be able to hold on to. From an earnings standpoint, that's not a bad guess with this company. It grows revenue each year like clockwork, but has posted heavy losses in three of the past four years.

What's the reason most stocks get shorted? Gravity. Traders who witness a great rise tend to expect a great fall, especially when the stock's rise is a significant multiple to the market's benchmark.

Just for comparison's sake, some of the companies with the lowest short ratio are investment bank Goldman Sachs (NYSE: GS), which recently paid back its TARP funds and posted a record quarterly profit. Another is bailed-out insurance giant American International Group (NYSE: AIG), which is basically a government entity. Bank of America (NYSE: BAC) has the lowest short-interest ratio in the S&P, just 0.28 days. Does that mean BofA is a buy? You bet your boots it does.

Andy Obermueller does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.