We recently published a list of 10 Best Big-Name Stocks to Buy Right Now According to Short Sellers. In this article, we are going to take a look at where Adobe Inc. (NASDAQ:ADBE) stands against the other big name stocks.
In early April 2024, Goldman Sachs Inc.’s data revealed that short selling on individual US-listed stocks was at the highest level in 6 months, and the most targeted sectors were technology, telecom, and media. This increase in short positions was seen after the significant ~9% advance seen in 1Q 2024 for the S&P 500. As per the data, some hedge funds that were using long-short equity strategies have started to fight the rally.
During extreme market volatility, short selling has become pronounced and has drawn significant interest from institutional and retail investors. It has prompted regulatory intervention as new reporting requirements have been issued by the SEC to offer transparency and ensure the availability of short position data.
Recent Trends in Short Selling
In the 2Q 2024, the US and Canadian markets saw an increase of ~$58 billion in short interest or a rise of 5.1% from the previous quarter.
Recently, S3 Partners, a renowned tracker of short-interest data, reported that the sectors that saw the largest increases in short exposure in 2Q 2024 included information technology (a rise of $49.3 billion), communication services (at $11.2 billion), and utilities (a rise of $3.7 billion) from the previous quarter. The sectors that saw the largest decrease in short exposure were the energy and financial sectors, down $12.3 billion and $1.6 billion, respectively.
Earlier in 2024, a significant surge in the leading AI giant resulted in losses of ~$3 billion for the short sellers. Some market experts even described this as an “AI-generated nightmare.”
In global equities, short interest climbed during July 2024, with strong increases seen throughout the Automobile (+13bps), REITs (+11bps), and Consumer Durables (+11bps) sectors, reported S&P Global. On the other hand, the largest decreases were in the Financial Services (-10bps) and Real Estate Management and Development (-4bps) sectors.
Talking about the US equities, the average short interest decreased to 77 basis points during July 2024. Significant increases in short interest were seen throughout REITs (+6 basis points) and the Household and Personal Products (+8 basis points) sectors. Conversely, the largest declines were in the Financial Services (-15 basis points) and the Automobile (-9 basis points) sectors.
Heavily Shorted Stocks Might Not Always Be in Distress, Says S3 Partners
S3 Partners revealed that there is a relatively weak correlation between short positions in certain assets and distress measures. This means that not all heavily shorted stocks are facing difficulties. As per the firm, broader market sentiments and valuation concerns are some of the factors that can drive short interest.
The company believes that shorting an asset can form part of broader strategies or hedging activities not linked to distress. It mentioned that there can be 3 measures of bearishness for stocks —- average analyst ratings (From 1 to 5), Credit default swap (CDS) spreads, and Altman Z-Score.
For example, the US Dollar had a low short position of ~1.32%. However, it had a high CDS spread of 1000 basis points. This indicates high perceived distress on the currency even though there is minimal short interest. This can be because of factors such as currency market dynamics or investor sentiments.
With that, let’s take a look at the best big name stocks to buy now according to short sellers.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A team of engineers and scientists collaborating at a workstation surrounded by their applications and solutions.
Adobe Inc. (NASDAQ:ADBE)
Number of Hedge Fund Holders: 107
Short % of Shares Outstanding (August 15, 2024): 1.18%
Adobe Inc. (NASDAQ:ADBE) operates as a diversified software company worldwide. It operates via 3 segments: Digital Media, Digital Experience, and Publishing and Advertising.
The company’s long-term visibility for increased revenue stems from its competitive advantages, such as switching costs and network effects. Its digital media segment benefits from significant switching costs. Critical products such as Creative Cloud and Document Cloud are integral to users’ workflows. This makes it difficult for users to switch to other solutions.
Adobe Inc. (NASDAQ:ADBE)’s shift to a subscription model tends to eliminate piracy and makes revenue recurring, apart from removing the increased upfront price for customers. This subscription-based model (SaaS) will help in achieving a steady and predictable revenue stream. Adobe Inc. (NASDAQ:ADBE) continues to extend its empire in the creative world from content creation to marketing services. This is happening through the expansion of the digital experience segment. This segment is expected to drive growth in upcoming years.
The company released its 2Q 2024 financial results, achieving record revenue of $5.31 billion as a result of strong growth across Creative Cloud, Document Cloud, and Experience Cloud. For 3Q 2024, it expects total revenue in the range of $5.33 billion to $5.38 billion and earnings per share of between $3.45 to $3.50.
Adobe Inc. (NASDAQ:ADBE) highlighted the positive reception of the generative AI models, like the Firefly family, and Acrobat AI Assistant. These were the critical drivers in enhancing creativity and productivity for users.
Mizuho reissued a “Buy” rating on the shares of Adobe Inc. (NASDAQ:ADBE), giving the price target of $640.00 on 7th June.
Polen Capital, an investment management company, released its second-quarter 2024 investor letter. Here is what the fund said:
“With Adobe Inc. (NASDAQ:ADBE), in some ways, we see it as a microcosm of the market’s “shoot first, ask questions later” approach to categorizing AI winners and losers. In the early part of last year, Adobe came under pressure with a perception that generative AI (GenAI) would represent a material headwind to their suite of creative offerings. In short order, the company introduced its GenAI offering, Firefly, which shifted the narrative to Adobe as a beneficiary with a real opportunity to monetize GenAI in the near term. Earlier this year, that narrative was again challenged as the company reported a slight slowdown in revenue growth. Results in the most recent quarter were robust as the company raised its full-year forecast across a number of key metrics and showcased better-than-expected results.”
Overall ADBE ranks 8th on our list of the best big name stocks to buy according to short sellers. While we acknowledge the potential of ADBE as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than ADBE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.