If you are thinking about shorting one of these companies, you’re doing something wrong
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The markets are dealing with an army of investors who are after heavily shorted stocks. But there are also fundamentally strong names where initiating a short position can be risky. These are the so called unshortable stocks.
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True, Short squeeze rallies have delivered multi-fold returns for investors. AMC Entertainment (NYSE:AMC) is the recent case of a short squeeze rally. However, this does not change the fact that some stocks are worth going short. It’s very likely that AMC stock will witness an equally sharp correction.
That’s not the case with unshortable stocks.
My focus is on four unshortable stocks where short interest as a percentage of free float is approximately 1%. Two of these stocks trade near all-time highs. The other two are in a consolidation mode and there seems to be a high probability of a breakout on the upside.
The reasons for these stocks being unshortable are strong fundamentals, high growth and strong cash flows. Additionally, there are ample positive business growth catalysts on the horizon.
Let’s take a deeper look into the reasons that make these stocks unshortable.
Unshortable Stocks: Nvidia (NVDA)
NVDA stock is currently trading near 52-week highs. However, the short interest in the stock is just 1% of the free float. This is probably an indication of the point that NVDA stock is among the unshortable stocks.
From a fundamental perspective, Nvidia has been on a high growth trajectory. For the first quarter of 2022, the company reported revenue growth of 84% to $5.66 billion. Growth was healthy in the gaming as well as data center segment.
In addition, Nvidia reported operating cash flow of $1.9 billion for the quarter. This would imply an annualized operating cash flow of nearly $8 billion. The company has high financial flexibility to invest in innovation and pursue inorganic growth.
In a recent news, Nvidia has asked Chinese regulators to approve the $40 billion acquisition of Arm. A possible approval in the coming quarters will ensure that the stock momentum remains positive.
With focus on artificial intelligence, Nvidia has also made inroads in multiple industries. This includes AI chips and solutions for robotics, self-driving and healthcare, among others. Therefore, with multiple growth catalysts, NVDA stock remains attractive.
TGT stock is another name that I would include among unshortable stocks. The stock trades near all-time highs and looks good for further upside.
UBS analyst Michael Lasser sees Target as “structurally improved as its strong positioning becomes even clearer in upcoming quarters.” Lasser has a price target of $265 for the stock.
As the U.S. economy witnesses wider reopening, Target is positioned to benefit. According to Moody’s Analytics, Americans were holding $2.6 trillion in excess savings as of mid-April. The possibility of a post-pandemic consumption boom is likely to be good news for Target, among other retailers.
Target has already been delivering stellar growth. For the first quarter, the company reported comparable sales growth of 22.9% on a year-on-year basis. Digital comparable sales growth was 50%.
Clearly, Target is emerging from the pandemic with superior omni-channel capabilities. Initiatives such as order pick-up, drive-up and same-day shipment services are likely to ensure that comparable sales growth remains strong.
From a financial perspective, Target reported cash flows of $1.1 billion for the quarter. With more than $4 billion in annualized cash flow visibility, dividend and share repurchase will continue.
Overall, TGT stock looks attractive considering the growth momentum. With an impending spending boom, it might be best to avoid shorting the stock.
Unshortable Stocks: Shopify (SHOP)
SHOP stock seems to be trading at premium valuations. However, the stock has consolidated in the broad range of $1,000 to $1,200. Short interest is low and considering the company’s growth outlook, the stock is among the top unshortable stocks.
For the first quarter, Shopify reported revenue growth of 110% on a year-over-year basis to $988.6 million. An important point to note is that monthly recurring revenue accelerated by 62% to $89.9 million. With sustained growth in monthly recurring revenue, the company is positioned for robust long-term cash flows.
With the pandemic, e-commerce growth has accelerated globally. Shopify is likely to benefit from positive tailwinds in the coming years. It’s also worth noting that the company has expanded offerings for merchants. This includes Shopify Capital, Shopify Shipping and Shopify Plus. As merchants scale up, there is ample scope for revenue growth.
As of March, Shopify reported $7.87 billion in cash and equivalents. As the company expands globally, there is ample financial flexibility to invest in platform upgrade and new merchant solutions. As an example, the company recently introduced Shopify POS offering to merchants.
Overall, SHOP stock looks attractive with strong top-line growth and clear visibility for robust cash flows in the long-term.
AAPL stock is another name that too risky to bet against. The company has always surprised investors and it seems that the stock is positioned for a breakout after the current consolidation. With strong growth and a production innovation pipeline, it’s not surprising that short interest in AAPL stock is less than 1% of the free float.
As I write, Reuters reports that Apple is in talks with Chinese manufacturers for a car battery factory in the U.S. The company seems to be gradually working towards its first electric vehicle. That’s likely to keep the markets excited.
Apple has also witnessed strong growth in the wearables and services segment. Besides strong top-line growth, revenue is more diversified. At the same time, iPhone sales are likely to remain robust with 5G being a key growth driver.
Apple’s cash glut also implies sustained value creation through share repurchase and possibly higher dividends. Of course, the cash buffer gives the company ample headroom to invest in product innovation and possible acquisitions.
Overall, as strong growth sustains, it’s too risky to short AAPL stock. On the contrary, current levels look attractive for considering some long-term exposure.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
Article by Faisal Humayun, InvestorPlace