Short Sellers Are Having a Field Day With This Steel 6-Pack
In our current market environment, sentiment can seemingly change on a whim, so it’s crucial that investors consider a stock’s short interest before buying. Typically, an increased number of shorting means that the Street has grown less fond of a particular stock, meaning that you might want to adjust your expectations accordingly. In some cases, overselling can sometimes have a positive effect on a stock’s price, so it’s not all doom and gloom in the world of shorting.
Known as a “short squeeze,” this particular situation can occur if short sellers are forced to cover their positions once a certain threshold is crossed. In most cases, this Mendoza line, so to speak, is near 50 percent of a stock’s tradable float. This week, we’ve seen a range of disappointing economic data, from slowing growth in China to more European downgrades. Some may think that industries like steel and manufacturing are unaffected by this news, but short selling activity in this area demonstrates the systemic nature of the global economy. Below are six steel stocks that have seen their short interest increase in recent weeks.
Worthington Industries (NYSE: WOR)
As one of the industry leaders in the American steel market, there seem to be plenty of reasons to be excited about Worthington, until you take a peek under the hood. The company is suffering from tight operating (4.3%) and net (4.7%) margins that are below many of its closest competitors, and currently trades at Price-to-Earnings (13.7X) and Price-to-Book (2.2X) ratios above the industry averages of 10.2X and 0.8X respectively. The company recently impressed in its fourth quarter earnings, though that hasn’t stopped the bears from circling in. Over the past month, short selling activity has increased by 13.7 percent, and WOR’s current short interest of 5.46 million shares is the highest level seen since last October. A days-to-cover ratio around 5 is decent, but higher than most optimists would like.
POSCO (NYSE: PKX)
Located in South Korea, POSCO is one of the largest steel companies in the world, and is currently in the works to partner up with peers in China and India to capitalize on its innovative FINEX machinery. Over the past three months, shares of PKX are down almost 7 percent, as the company missed badly in its first quarter earnings earlier this year. Specifically, it posted earnings of $370.8 million, a 54 percent decline year-over-year. Since this time, short interest has increased by 52.1 percent, marking a 52-week high. Going forward, it will be crucial to monitor the company’s next earnings release in August. By year’s end, analysts are expecting an EPS of $7.61 a share, down from the $10.74 PKX reached in 2011.
Nucor Corp (NYSE: NUE)
Nucor is officially the largest steel producer in the U.S., in addition to being the country’s largest dealer of scrap metal. In 2012, shares of NUE have lost 4.7 percent in value, as the company disappointed in its first quarter earnings release with an EPS decline of 8 percent year-over-year. In the three months since this miss, short interest has jumped by over 36 percent, currently resting at 11.24 million shares. This is just off the 12.27 million seen in June, though its notable that these figures had not surpassed 10 million in the 52 weeks prior. The stock is currently trading at P/E (15.7X), P/B (1.6X), and P/S (0.6X) ratios at a 30 to 50 percent premiums above industry norms.
Sims Metal Management (NYSE: SMS)
A slightly different breed than its aforementioned peers, Sims Metal is a full-fledged scrap metal recycling company, formed after a 2008 merger between Metal Management and Sims Group. Because of this merger, SMS now has operations in the U.S. and Australia, though this has not helped the company’s profitability post-recession. Over the past three years, SMS has seen its earnings wilt by an average of 32.8 percent per year, as net margins (-4.3%) deserve most of the blame. In recent weeks, short interest surrounding Sims has jumped by 14.8 percent on abnormally high volume. Year-to-date, the stock has dropped nearly 30 percent, and FY12 earnings of $0.40 a share were way below the $0.93 Sims reported in 2011. Looking ahead to 2013, analysts are expecting earnings of $0.54 a share.
Gerdau SA (NYSE: GGB)
Gerdau is a Brazilian-based steelmaker with its fingers in 14 countries in the Western Hemisphere. Over the past three months, shares of GGB have dropped 13.0 percent, though this has outpaced the industry as a whole (-17.6%). Last quarter, GGB surprised the Street with an earnings shrinkage of 5.4 percent year-over-year, as the company blamed bloated costs on a heavier-than-normal Brazilian rainy season. Over the past month, short interest in Gerdau has increased by 13 percent, with overall activity practically doubling since the beginning of the year. With a days-to-cover ratio under 2, however, there looks to be little stopping the bears from reversing their positions if any upward pressure is placed on the stock.
Ternium SA (NYSE: TX)
Last but not least, Ternium has seen its short interest more than double in 2012, as bears are betting against this Latin American steelmaker at a level (617,519 shares) not seen since last fall. Interestingly, TX missed on its last earnings release by nearly 20 percent. The Street was expecting a bottom line of $0.65 a share; TX reached just $0.53. Going forward, analyst consensus forecasts that the company will finish 2012 with an EPS of $3.27, down from the $3.42 it reported in 2011. If the company’s short interest is any indication, the markets are already weighing this decline. As of this writing, WealthLift’s Sentiment Index rates TX as a sell, with over half of the community’s users placing an “underperform” rating on the stock.
Disclosure: The author has no holdings in the stocks mentioned in this article and has no plans to initiate any positions within the next 72 hours. He does, however, have the intention of rating these stocks on WealthLift.com, a social media website where investment ideas are shared openly and free.
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The Chartist