There are some stocks that are everyone’s favorites; I believe Apple Inc. (NASDAQ:AAPL) and The Coca-Cola Company (NYSE:KO) fall into this category. Then there are others that a lot of investors are skeptical about; such stocks carry a high short interest as investors bet that their price will go down. However, you often make the biggest gains in stocks that most investors are betting against if you are able to correctly determine that the bears are mistaken. I believe that the bears have got it wrong with Tesla Motors Inc (NASDAQ:TSLA) and Research In Motion Ltd (NASDAQ:BBRY), but the same cannot be said of Cliffs Natural Resources Inc (NYSE:CLF).
This electric car maker is on a tear
Tesla Motors Inc (NASDAQ:TSLA)’ stock shows the most classic case of a short squeeze. The electric car maker has a lot of doubters who believe that Tesla’s electric vehicles will have a hard time competing with the internal combustion engine and hybrid vehicles. Skeptics argue that a high price, range anxiety and performance issues related to Tesla’s Model S will impact the company’s financial performance. However, the bear thesis on Tesla Motors Inc (NASDAQ:TSLA) has started to crack as short sellers start to understand the strong global demand for Tesla’s exquisite Model S.
Tesla recently reported its first quarter earnings which showed that the company made a profit for the first time; the company reported and EPS of $0.12 which exceeded consensus estimate of $0.04. Tesla’s revenue increased 83% quarter-on-quarter to $562 million, beating consensus estimate of $492 million. In another blow to short sellers and skeptics, Tesla increased its full year Model S sales guidance to 21,000 cars versus initial outlook of 20,000 vehicles for the year. In its shareholder letter, Tesla management also said that the demand for its Model S cars remains strong throughout the world. Although Tesla Motors Inc (NASDAQ:TSLA) stock is up more than 90% in the past three months, the stock still carried a short interest that represented more than 37% of its float as of April 30th, which would take a lot of time to unwind as investors understand the company’s long term potential.
The turnaround has just started
Research In Motion Ltd (NASDAQ:BBRY) Blackberry stock has also drawn a lot of interest from shorts; as of April 30, Blackberry had a short interest of more than 164 million shares which represents more than 33% of its float. As with Tesla, the bear thesis on Blackberry is also flawed. Blackberry has had a tough time in the past two-three years as it saw its market share eaten up by Apple Inc. (NASDAQ:AAPL) and Samsung while the Blackberry 10 OS faced delays. However, since its launch, the BB10 has received outstanding reviews, with many praising Blackberry’s security features and BB10’s intuitive gesture based interface.
In its Q4 2013 earnings release, Research In Motion Ltd (NASDAQ:BBRY) surprised analysts by posting an EPS of $0.22 vs. consensus estimates of a loss of $0.32 spurred by sales of 1 million Z10 devices and cost cutting measures. The relatively higher average selling price of the Z10 also helped Blackberry increase its gross margin to 40.1% in Q4 2013 versus 30% in Q3. Recent reports indicate that there is very strong interest in the Blackberry Q10, the first QWERTY based phone that runs on the BB10 platform, with reports suggesting that the device has been sold out at some stores in the UK and Canada where it has already been launched.
Although the short squeeze in Research In Motion Ltd (NASDAQ:BBRY) has not been quite as dramatic as Tesla Motors Inc (NASDAQ:TSLA), the stock is still up almost 30% this year, and I expect the shorts to continue to gradually get squeezed out as the sell-through of the Z10 and Q10 gets clearer and as Blackberry launches more BB10 based devices later this year to target the emerging markets.
China is a big thorn for Cliffs Natural Resources Inc (NYSE:CLF)
Another stock that short sellers are targeting right now is Cliffs Natural Resources Inc (NYSE:CLF), which has a short interest that represented almost 25% of the stock’s free float. Although the stock has had a horrid past few months, it is up more than 20% since hitting a low of $17.32 in late April thanks to short covering after its Q1 earnings release.
However, I don’t expect the short squeeze to continue in this stock. The bear thesis on the iron ore producer relates to the slowdown the global economy, especially China. In 2012, Cliffs’ revenue from China was $2 billion, which accounted for more than 34% of the company’s overall revenue. The Chinese economy grew 7.7% year-on-year in the first quarter of the year, down from 7.9% in Q4 2012. China’s official manufacturing PMI dropped to 50.6 in April from 50.9 in March, another sign that the Chinese growth is slowing down. This is having an impact of the iron ore price, which has dropped 11% from the peak in February to $137.40 a ton in April.
The impact of the slowdown in demand and lower iron ore prices can be seen in the company’s earnings results. In its Q1 results, Cliffs Natural Resources Inc (NYSE:CLF) reported that its revenue declined 6% year-on-year to $1.1 billion, driven by a 10% year-on-year decrease in iron ore sales volume. The company increased its full year guidance for U.S. iron ore sales by 1 million to 21 million tons while maintaining its guidance for other regions. However, sales from Cliffs’ Asia Pacific Iron Ore division are highly sensitive to spot iron ore price, and a further fall in price due to the slowdown in China could have an adverse impact on the company’s outlook. Therefore, I expect the price of its stock to remain under pressure.
Investing in stocks with a high short interest is always risky due to the increased volatility of such stocks. However, if you get your thesis right, there is a lot of return to be made as the short squeeze plays out. I believe that the short squeeze will continue in Tesla Motors and Blackberry, but not in Cliffs Natural Resources Inc (NYSE:CLF).
The article Will The Short Squeeze Continue? originally appeared on Fool.com and is written by Zain Zafar.
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