The COVID-19 pandemic led to the biggest global economic crisis of the century. The stock market has recovered, however, and has galloped ahead since its deep correction last March. The S&P 500 has returned 42.2% over the past year.
However, the rising tide has not lifted all boats and some companies have been viewed with skepticism by market participants. Investors’ bearish sentiments are often manifested in their short-selling activity; they bet against stocks that they believe have become overvalued relative to their fundamentals and are vulnerable to a pullback.
The short percentage of float is a commonly used metric for understanding how aggressive a stock's short sellers have been. The short percentage of float is defined as the portion of a company’s total available share for public trading (or floating shares) shorted by traders.
In recent months, many investors have been introduced to the short squeeze, a phenomenon that has sent shares of struggling businesses like GameStop (GME) and AMC Entertainment (AMC) skyrocketing. Experts believe that the bullish market may keep the trend going and many highly shorted stocks could get caught up in this short squeeze flurry.
Rocket Cos. Inc. (RKT)
RKT is a Detroit-based holding company that consists of personal finance and consumer service brands that Rocket Mortgage, Rocket Homes, Rocket Loans, Rocket Auto, Rock Central, Amrock, Core Digital Media, Rock Connections, Lendesk and Edison Financial. RXT was founded in 1985 but was listed as recently as August 2020.
RKTs highly anticipated public-market debut ended up pricing at $18, below the original $20 - $22 price guidance. But the stock closed its debut session gaining 19.5% and has been trading sideways since. However, on March 2, the stock jumped as much as 77% in intraday trading to hit its all-time high of $43.00, thanks to WallStreetBets, only to fall back and close yesterday’s trading session at $25.83. RKT’s current short interest is 35.05% of its total share float, indicating that more than one-third of the stock is shorted.
The Federal Reserve's accommodative stance since March last year--it has promised to hold interest rates near-zero for the foreseeable future--has triggered a huge mortgage refinancing pressure on RKT. And now, a quick uptick in long-term Treasury yields is leading to higher mortgage rates and consequently fewer mortgage applications. In addition, headwinds from federal eviction forbearance periods and foreclosures are also weighing in on the company.
Nevertheless, RKT is innovating despite an unfavorable economic backdrop. Its flagship company, Rocket Mortgage, America’s largest mortgage lender, recently launched a national mortgage broker directory. This allows homebuyers to refinance their current loans more easily, including an option to process the application though a local independent mortgage broker.
In the fourth quarter (ended December 31, 2020), RKT reported adjusted revenue of $4.8 billion, increasing 162% year-over-year. The company generated record closed loan origination volume of $107.2 billion and net rate lock volume of $96.0 billion during the quarter, which represented improvements of 111% and 119%, respectively, compared to the prior year. Rocket Auto, its automotive retail marketplace, facilitated the sale of 9,400 auto units, up more than 2,000 units year-over-year. Its net income soared a whopping 277% year-over-year to $2.8 billion.
In late January this year, RKT witnessed a surge of 14.5% intraday despite no big headlines. Following this CEO Jay Farner issued a word of caution for short sellers. He said RKT is "not a stock you want to be short in." Investors are concerned about RKT’s survival in a higher-rate environment when the mortgage business is weak. However, the company’s auto lending and related businesses are picking up pace as consumer’s purchasing power stabilizes. . In addition, Wall Street analysts expect RKT’s EPS to grow 26.8% per annum in the next five years. Hence, the stock might soon witness a short-covering rally.
It’s no surprise that RKT has an overall rating of C, which translates to Neutral in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting. RKT also has a D grade for Growth, Stability and Sentiment. In the 105-stock D-rated Financial Services (Enterprise) industry, it is ranked #77.
In total, we rate RKT on eight different levels. Beyond what we’ve stated above, we have also given RKT grades for Value, Momentum, and Quality. Get all the RKT ratings here.
GSX Techedu Inc. (GSX)
GSX is a technology-driven education company that provides online K-12 after-school tutoring services in the People's Republic of China. The company is being investigated by the U.S. Securities and Exchange Commission (SEC) after investors accused it of inflating its sales numbers.
In May 2020, short-seller Carson Block and his firm Muddy Waters Research alleged that at least 70% of the company's users are fake and concluded that the company is a near-total fraud. In fact, famed short-seller Andrew Left of Citron Research also released a scathing report at about the same time. The firm believes that GSX’s enrollment numbers stood out in the highly competitive online education industry and, hence, they are shorting the stock. “If the audits are done properly it will go to zero and delist,” Left asserted.
GSX has also been riding the short-squeeze wave. On January 27, shares of GSX soared as high as 42% in intraday trading to hit its 52-week high of $149.05. Not surprisingly, GSK tumbled 33% in the very next trading session. GSX still has a short float of 37.97%, indicating that the stock has been highly shorted. Even though the stock is up 58.7% so far this year, GSX has lost 14.6% in the past month to close yesterday’s trading session at $82.05.
GSX reported revenue of RMB 2.21 billion for the fourth quarter (ended December 31, 2020), growing 136.5% compared to the year-ago quarter. The increase was driven mainly by the growth in paid course enrollments for K-12 courses. The number of online K-12 paid course enrollments increased 112.8% year-over-year , which was driven by both first-time paid course enrollments and the retention of existing students. Despite such scale and operational efficiency, the company failed to generate profits and reported an adjusted net loss per ADS of RMB 2.29.
GSK has recently issued an update on the status of its internal review on the accusations about its sales numbers. It said the review committee did not uncover evidence that would have a material impact on GSX's previously reported financial statements. GSX benefited largely from greater demand for online tutoring in China due to in-person tutoring being suspended as COVID-19 cases started rising. However, analysts expect the trend to slow down this year and estimate GSX’s current quarter revenue and EPS to decline 77.8% and 131.6%, respectively.
GSX’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, which equates to Sell. GSX has an F grade for Growth and Sentiment. It is ranked #28 of 31 stocks in D-rated Outsourcing - Education Services group.
In addition to the POWR Ratings grades I’ve just highlighted, you can see the GSX’s ratings for Value, Momentum, Stability and Quality here.
Gogo Inc. (GOGO)
GOGO is the world's largest provider of broadband connectivity services for the business aviation market. The company offers a customizable suite of smart cabin systems for highly integrated connectivity, inflight entertainment and voice solutions. There are more than 1,700 business aircraft flying with GOGO's AVANCE L5 or L3 system installed. As of December 31, 2020, GOGO reported 5,778 aircraft flying with its ATG systems onboard, and 4,702 aircraft with satellite connectivity installed.
GOGO has surged more than 360% in the past year. Despite the rally, the stock has a short float of 37.54%. GOGO was targeted by the Reddit traders as the stock shot up and saw unusually large trading volumes in a couple trading sessions over the past three months. In fact, GOGO gained as much as 15% yesterday after reporting its fourth quarter earnings. However, the stock soon faltered and was down 8% to close yesterday’s trading session at $11.52. GOGO has lost nearly 17% in the past month and is now trading 33% below to its 52-week high of $17.23.
In the fourth quarter (ended December 31, 2020), GOGO’s sales were $77.6 million, declining 10% year-over-year, driven by decreases in both service and equipment revenue caused by the negative impact of COVID-19 on demand for air travel. Service revenue of $56.9 million decreased 3% from the comparable quarter last year, resulting primarily from a 4% decline in average monthly connectivity service revenue per ATG aircraft online (ARPU). Equipment revenue of $20.7 million decreased 24%, due primarily to lower narrowband satellite unit shipments. As a result, GOGO reported an adjusted loss of $0.11 per share, which was far worse than the consensus estimated loss of $0.08 per share.
Last December, the company exited the commercial aviation market by selling the business to Intelsat for $400 million. The business served some 20 commercial airlines, including nine of the top 20 global companies. Because the company has been streamlining its operations to focus on its proprietary spectrum and serve the business aviation market, analysts believe its current quarter EPS will improve 35.3% but revenues will decline 2.9%. However, it is worth noting that most of GOGO's short interest is tied to its convertible debt, making it unlikely to witness a further squeeze in the near-term.
According to our POWR Ratings, GOGO has an overall rating of F, which equates to Strong Sell. GOGO also has a grade of F for Sentiment, and D for both Growth and Stability. It is ranked #66 of 68 stocks in the Air/Defense Services industry.
In addition to the POWR Ratings grades I've just highlighted, you can see the GOGO’s ratings for Value, Momentum, and Quality here.
Clovis Oncology, Inc. (CLVS)
CLVS is a biopharmaceutical company that focuses on acquiring, developing, and commercializing anti-cancer agents in the United States, the European Union, and internationally. The company generally targets specific subsets of cancer and has license agreements with leading healthcare companies including Pfizer Inc. (PFE), AstraZeneca UK Limited (AZN), Advenchen Laboratories LLC, and 3B Pharmaceuticals GmbH, and Bristol Myers Squibb (BMY), and a partnership with Foundation Medicine, Inc.
CLVS has been out of favor for several years, due primarily to the commercial failure of its flagship anti-cancer product Rubraca. As a result, the stock has lost more than 75% over the past two years. CLVS hit its 52-week of $11.10 on February 8 after surging as much as 39% in just two trading days. The stock has retreated from those levels to close yesterday’s trade at $6.25. CLVS is down 27.3% in the past month and short sellers still represent 41.88% of float, which indicates that the stock is highly shorted.
In the fourth quarter ended (December 31, 2020), CLVS’s global net product revenue for Rubraca increased 10% year-over-year to $43.3 million. However, its U.S. product revenues remained flat over the prior year. CLVS announced top line results of the ARIEL4 randomized Phase 3 study of Rubraca versus standard-of-care chemotherapy during the quarter, in which Rubraca met the primary goal of significantly improving progression-free survival. However, the company is still not profitable and reported a loss of $1.02 per share, compared to year-ago loss of $1.81 per share.
While CLVS is not yet out of the woods, the stock may turn around this year if the company can maintain Rubraca sales and further convert clinical data for its product-line into commercial success, particularly its peptide-targeted radionuclide therapy FAP-2286, top-line ATHENA monotherapy data, and initial efficacy data for the LIO-1 lucitanib and Opdivo combination trial. Though Wall Street analysts anticipate near-term weakness, they expect the company’s current year revenue and EPS to improve 57.7% and 32.5%, respectively.
CLVS’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, which translates to Sell. The stock has an F grade for Sentiment and D for Quality. In the 486-stock, F-rated Biotech industry, it is ranked #234.
Click here to see the additional POWR Ratings for CLVS (Growth, Value, Momentum and Stability).
The POWR Ratings assesses stocks by 118 different factors, each with its own weighting.
Want More Great Investing Ideas?
RKT shares were trading at $24.95 per share on Friday afternoon, down $0.88 (-3.41%). Year-to-date, RKT has gained 23.39%, versus a 5.10% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.4 Stocks with More Than 30% Short Interest appeared first on StockNews.com