Recent economic data, including the cooling labor market and slowing service sector, and a string of bank collapses are raising the odds of a recession. Amid a challenging macro environment, investors should stay away from risky stocks.
Shift4 Payments, Inc. (FOUR), ChargePoint Holdings, Inc. ($CHPT), which possess a relatively high short interest.
Generally, short interest as a percentage of float above 10% indicates a pessimistic sentiment surrounding the stock. It also heightens the probability of a short squeeze, which leads to unexpected price increases.
Before delving deeper into the fundamentals of these heavily shorted stocks, let’s discuss what’s affecting the overall market sentiment.
Last month, the Federal Reserve approved a quarter-percentage-point interest-rate hike and indicated that rate increases are approaching an end. The Fed’s decision marked its ninth consecutive rate hike since March 2022, bringing its federal funds rate to a 4.75%-5% range.
The central bank’s efforts to cool the labor market are finally coming into effect. Total nonfarm payroll employment added 236,000 net jobs in March after adding 326,000 in February and a 472,000 gain in January.
According to Former Treasury Secretary Lawrence Summers, the likelihood of a recession is rising after a series of weak economic indicators. Summers also wants the Fed to rethink its internal models, which failed to anticipate the surge in inflation that began in 2021 and couldn’t capture risks emerging in the financial system.
Amid growing recessionary pressures, investors remain highly uncertain about the economic outlook. Given this backdrop, avoiding highly shorted stocks $FOUR, $CHPT could be wise.
REVISED: 2023 STOCK MARKET OUTLOOK
Let’s take a closer look at the fundamentals of the featured stocks:
Shift4 Payments, Inc. ($FOUR)
FOUR offers various software and payment processing solutions. Its omnichannel card acceptance and processing solutions include credit, debit, contactless card, Europay, Mastercard and Visa, QR Pay, and alternative payment methods. It also provides proprietary omnichannel gateway, integrated and mobile point-of-sale (POS) solutions, and risk management solutions.
FOUR has a short interest of 8.47 million and a short float of 15.81%.
FOUR’s trailing 12-month gross profit margin of 23.59% is 60.5% lower than the industry average of 59.75%. Likewise, the stock’s trailing 12-month EBIT and net income margins of 4.14% and 3.77% are lower than the industry averages of 22.13% and 26.65%, respectively.
For the year that ended December 31, 2022, FOUR’s cash outflows from investing activities came in at $516.80 million, up 203.1% year-over-year, while cash outflows from financing activities were $214.60 million, compared to cash inflows of $471.2 million during the prior year. As of December 31, 2022, the company’s current liabilities were $268.30 million, up 46% from December 31, 2021.
Over the past month, shares of FOUR have gained 10.5% and 55.8% over the past six months to close the last trading session at $72.16. A significant recent spike in the stock’s share price indicates a short squeeze.
ChargePoint Holdings, Inc. ($CHPT)
CHPT offers electric vehicle (EV) charging networks and solutions in the United States and internationally. The company provides a portfolio of hardware, software, and services for commercial, fleet, and residential customers. It has a short interest of 51.04 million and a short float of 15.56%.
CHPT’s trailing 12-month gross profit margin of 18.36% is 38.2% lower than the industry average of 29.70%. And its trailing 12-month EBITDA margin of negative 67.66% compares to the industry average of 13.21%. Also, its trailing 12-month net income margin of negative 73.73% compares to the 6.50% industry average.
CHPT’s total operating expenses increased 15.1% year-over-year to $111.30 million in the fourth quarter that ended January 31, 2023. The company reported a loss from operations of $78.31 million for the quarter. In addition, net loss attributable to common stockholders and net loss per share came in at $78.01 million and $0.23, respectively.
Also, as of January 31, 2023, the company’s total liabilities stood at $724.32 million, compared to $308.88 million as of January 31, 2022.
Analysts expect CHPT to report a loss per share of $0.16 for the current quarter (ending April 2023). Furthermore, the company’s loss per share for fiscal years 2023 and 2024 are expected to come in at $0.47 and $0.19, respectively.
Over the past six months, CHPT has plunged 32.1% to close the last trading session at $9.35. The stock has declined 43.4% over the past year.
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