Continuing my series utilizing the filters on SchaeffersResearch.com, I'm checking out some struggling stocks with heavy short interest - coupled with excessive optimism on the Street - as these bearish bets can often place additional selling pressure on already-downtrending equities. Taking a look at the stock screener's results, one equity seemed to stick out: insurance company Assured Guaranty (AGO: sentiment, chart, options) .
To see how I utilized this filter, check out a recent edition of Short Interest Report.
Mortgage Market Misery
Before we delve into the short-interest data, let's take a look at how the financial firm is faring on the charts. Along with its sector peers, the shares of AGO have suffered of late, underperforming the S&P 500 Index (SPX) by more than 35% during the past 60 trading days. The stock has journeyed about 44% into the red year-to-date, and is currently trading beneath short-term resistance from its 10-day moving average near $14.60 – less than 2 points above its all-time low obtained in November 2007.
Skepticism Swells Among Short Sellers
Now, turning back to what peaked my interest to begin with... Short interest on AGO has been steadily accumulating since late 2007, indicating short sellers are becoming increasingly pessimistic toward the security. In fact, these bearish bets jumped more than 50% higher during the past month, and now account for nearly 16 million shares – or roughly 28% of the stock's total available float. Should these skeptics choose to add to their winning positions, a continued increase in short interest could pressure the equity even further into negative territory.
Word on the Street
While it's none too surprising that short sellers are pessimistic toward the downtrending shares, it is somewhat unnerving that 6 out of 9 ranking analysts rate them a "buy" or better, according to Zacks. What's more, Thomson Financial reports that the average 12-month price target on the stock stands at $30.43 – more than double the security's current price. Should AGO continue its journey downward, possibly marking a new all-time low, any downgrades and or price-target cuts could weigh further on the shares.
On par with the high hopes on the Street is that in the options pits. While the stock's Schaeffer's put/call open interest ratio (SOIR) – measuring options slated to expire within 3 months – stands at 0.95, indicating that puts and calls are virtually even among near-term options, the SOIR's annual percentile docks at 29%. In other words, short-term option speculators have been more bullishly aligned toward AGO less than 30% of the time during the past 52 weeks.
The Bottom Line
AGO investors should keep an eye on the 13.30 level, as a drop below this neighborhood would place the stock in all-time low territory. What's more, a new low may inspire short sellers to add to their bearish bets or the bulls on the Street to reconsider their positions – all potential catalysts to the downside.
To read more of my and my colleagues' thoughts on the market, please visit our Schaeffer's Daily Market Blog section throughout the trading day.
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