Short Sellers, Analysts Love These Stocks; Who Is Wrong?Michael P. Regan
If you are looking for an efficient way to annoy a fan of efficient-markets theory, tell them about Antero Resources Inc.
The shale-gas producer can probably expect many fruit-basket deliveries from Wall Street bankers this holiday season. The company went public 13 months ago, sold another $744 million in stock in May, then spun off its pipeline partnership in a $1 billion offering this month.
The analysts covering Antero love the stock, giving it a consensus recommendation score of 4.28 on a scale that awards five points to the equivalent of a buy rating and one point to a sell. That compares with the Russell 3000 Index average of 3.84. Analysts on average estimate the stock, which is down 18 percent this year as of yesterday, will gain 27 percent in 12 months.
You know who else loves Antero? Short sellers. They’ve borrowed about one-fifth of the company’s equity float, or shares available for trading, in the hopes of profiting from a drop in the share price.
As Wall Street strategists advise that the tightly correlated returns of recent years are breaking down and the art of picking individual stocks is due for a comeback, companies loved by both analysts and short sellers seem like a perfect place to start shopping for shares to buy or sell.
Antero is not alone. There are approximately 25 other companies worth more than $1 billion in the Russell 3000 that are loved by both analysts and shorts, according to a screen by Bloomberg equity analyst Kevin Kelly.
The list captures stocks with a recommendation consensus score that’s greater than four. Each has more than 10 analysts covering the company and they have an average price target that calls for at least a 10 percent gain. The companies also all have a rising short interest of more than 10 percent of float that would require at least five days of average trading volume to cover.
One way to show where the tensions are the greatest is to add the short interest to the consensus recommendation score and average expected price gain. By that measure, Celldex Therapeutics Inc., EP Energy Corp., Ubiquiti Networks Inc., Eclipse Resources Corp. and Arista Networks Inc. top the list.
Ranking them by market capitalization, Kinder Morgan Inc. is the biggest, though its 19 percent short interest is probably a result of merger-arbitrage strategies stemming from Richard Kinder’s plan to consolidate his pipeline empire in a series of transactions. After Kinder Morgan, Antero, Stratasys Ltd., Gamestop Corp. and Arista Networks are the biggest companies on the list.
So are the shorts right and these stocks have rough days ahead? Or are the analysts right, and the shorts are in for a squeeze that sends the shares higher? Well, stock picking is an art form, and the paintbrush is in your hands.