Should a large amount short interest condemn an investment? I do not believe so, and actually want to caution you to avoid automatically disqualifying a stock like that–some could be great opportunities for long term investors.
Finding the Stocks that Deserve Love
When you are investing against the shorts, who do you want to have on your side? Well, management would be nice. When I see a heavily shorted stock, I immediately look at insider ownership. If shorts are piling up and management has no skin in the game, this should represent a red flag to investors. However, if management has large stakes in the business, I view that as a signal of confidence that the short’s case is either insubstantial or short-term oriented.
Here are three stocks that have a significant short-interest, but I believe could be long-term winners—and it seems as though insiders agree.
|Stock||Market Cap||Insider Ownership||Short Interest|
Arcos Dorados Holding Inc (NYSE:ARCO)
Proto Labs Inc (NYSE:PRLB)
Under Armour Inc (NYSE:UA)
Arcos Dorados Holding Inc (NYSE:ARCO) has the exclusive right to operate and franchise McDonald’s restaurants in Latin America. This represents a great opportunity in a region that has approximately 590 million people and just fewer than 2,000 full-service McDonald’s restaurants; the United States has a population of roughly 314 million, but over 14,000 McDonald restaurants. This leaves an ample amount of room for Arcos Dorados Holding Inc (NYSE:ARCO) to increase its restaurant count. So why are the shorts piling in?
The major reason is the economic and political instability of the region. Arcos Dorados Holding Inc (NYSE:ARCO)’s largest market, Brazil, seems to have fallen in love with protests, while Venezuela and Argentina continue to prove unfriendly to businesses. Combine this with a majority of the countries across this region seeing their currencies weaken against the dollar, and it has significantly hampered revenue. An example of how much this has hurt Arcos Dorados Holding Inc (NYSE:ARCO): in 2012 it had organic revenue growth of 14%, but with currencies in the region depreciating, growth in nominal terms came in at just 3.6% recently.
The bright side, and what I tend to focus on, is that Arcos Dorados Holding Inc (NYSE:ARCO) continues to generate more than $200 million in operating cash flow. It then plows this back into the business to fund new restaurant growth and take advantage of its growth opportunities in this emerging region. If this continues, long-term oriented investors should be rewarded.