Hedge funds piling into a stock is a signal of conviction. After all, if institutional investors are backing a company, there has to be a good reason for it, right?
Things get interesting when the same stock ends up with a high short interest. Where some investors back the company to become successful, others bet on its downfall. This contradiction is often eagerly tracked by investors, as it can potentially lead to explosive moves to either side.
Consider, for instance, a scenario where a stock with a high short interest and a high hedge fund holding starts going up. As everyone rushes to buy more of the already popular stock, short sellers rush to close their positions, triggering a strong bull rally.
We decided to shortlist stocks that were the most likely candidates for such a rally. To come up with our list of 15 most crowded hedge fund stocks that are targeted by short sellers, we only considered stocks with a market cap of at least $1 billion and a short interest of at least 3%. We then ranked these stocks by the number of hedge funds that have the stock in their portfolio.
15. Quanta Services, Inc. (NYSE:PWR)
Number of Hedge Fund Holders: 67
Short Interest: 3.42%
Quanta Services, Inc. operates as an infrastructure solutions provider. It offers its solutions for the pipeline, electric, and gas utility, communications, energy, and renewable energy industries. The company operates through Electric Power Infrastructure Solutions, Renewable Energy Infrastructure Solutions, and Underground Utility and Infrastructure Solutions segments.
Puerto Rico recently experienced a significant power outage affecting nearly 1.4 million customers, with 400,000 also losing access to water. Luma Energy, which is a joint venture between Canadian energy firm ATCO and Quanta Services, reported that vegetation on transmission lines and technical issues caused the blackout. Power was restored to 56.3% of the company’s total customers by 1 p.m. EST.
An analyst at Piper Sandler recently started coverage on the company with an Overweight rating. The firm showed optimism for the stock despite the recent outage. It named PWR as its top pick, amidst short-term uncertainties about recent policy shifts.
Kashy Harrison pointed to the company’s track record by saying:
“Quanta Services has met or exceeded quarterly street EPS expectations every quarter since 3Q’19. It is the market leader in T&D [transmission and distribution] and renewable generation services, with potential upside from electrical system work for data centers and onshoring of manufacturing supply chains via the Cupertino acquisition.”
14. HEICO Corporation (NYSE:HEI)
Number of Hedge Fund Holders: 67
Short Interest: 4.02%
HEICO Corporation is an aerospace and defense company. Its stock has outperformed the market so far this year, but a high short interest is keeping investors on edge. HEI trades at a PE of 65, above its 5-year average of 60.4. This high valuation is in part driving the short sellers’ confidence, though the hedge funds aren’t buying the stock without reason either.
HEI is one of those stocks where the active management itself has a stake. The Mendelson family has been running the company for well over three decades and hasn’t done a bad job. Moreover, the stock incentives structure for employees means every employee feels a part of the company, preferring to take stock when given the opportunity.
It is the future growth that is keeping the valuation high in HEICO’s case. The company’s Flight Support Group has grown at a long-term average of 7% while other segments have shown even better growth in the recent past. Operating margins continue to go up, once again demonstrating the management’s abilities. So, what are the short sellers looking at in the stock?
HEICO has a solid business, and its growth rate is impressive. However, the October quarter last year failed to deliver the expected numbers and could well have raised some short-term concerns. The management pinned it on inventory destocking, and short sellers are possibly thinking the high valuation wasn’t justified. The stock fell considerably in the months after that earnings announcement, but has almost regained all the losses, mainly due to the proven strength of the business.