3 Stocks With Short-Covering Potential

Short interest has surged on Actavis plc (ACT), Starwood Property Trust, Inc. (STWD), and The Western Union Company (WU)

Mar 19, 2015 at 9:49 AM
facebook twitter linkedin


A handful of equities have seen notable spikes in short interest in recent reporting periods, all while lingering in multi-year or record-high territory. Sentiment backdrops such as these are noteworthy, because they could offer up a potential contrarian play, as short sellers capitulate to the equity's upward momentum -- creating a fresh burst of buying power along the way. According to Schaeffer's Quantitative Analyst Chris Prybal, drugmaker Actavis plc (NYSE:ACT), real estate investment trust (REIT) Starwood Property Trust, Inc. (NYSE:STWD), and money transfer specialist The Western Union Company (NYSE:WU) are three names that fit this category.

Actavis plc (NYSE:ACT)

ACT has been a standout on the charts, boasting a 21.2% year-to-date lead. In fact, the shares hit their highest perch on record of $315 yesterday -- thanks to a price-target hike to $373 from $286 at BMO -- and were last seen trading at $311.87. The brokerage firm, however, just followed in the footsteps of Goldman Sachs and Morgan Stanley, which gave upbeat assessments of ACT following Tuesday's pair of fundamental wins.

In spite of ACT's technical tenacity, short interest jumped 19% over the past two reporting periods, and now accounts for a healthy 9.4% of the equity's available float. What's impressive is the security's ability to rally into uncharted territory in the face of this selling pressure. Additionally, at ACT's average daily pace of trading, it would take more than five sessions to cover these bearish bets, leaving an ample amount of sideline cash available to help fuel the security's fire.

Starwood Property Trust, Inc. (NYSE:STWD)

STWD has gotten a lift higher from its 20-month moving average for roughly three years, and a quick bounce off this trendline last October helped send the stock to an all-time peak of $24.67 on March 2. More recently, the shares were seen lingering near $24.31, enjoying a newfound foothold atop their 80-day moving average -- a trendline that resisted the stock's advances earlier this month.

Monthly Chart of STWD Since January 2012 With 20-Month Moving Average

Over the last two reporting periods, however, short interest on STWD surged 10.2% to 8.2%, translating into 9.2 days' worth of pent-up buying demand, at typical trading levels. Elsewhere on the Street, the stock's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 20.94 ranks just 6 percentage points from an annual peak. In other words, puts have been bought to open over calls at an annual-high clip. Should STWD resume its quest for record highs, an unwinding of these bearish bets could result in a wave of buying power.

The Western Union Company (NYSE:WU)

WU has been on a stellar run since unveiling a well-received earnings report -- and springboarding off its 140-day moving average -- in early February. Specifically, since closing at $18.40 on Feb. 10, shares of WU are up 5.2% at $19.35 -- and tagged a three-year high of $20.10 along the way.

Short sellers are unconvinced of the equity's ability to sustain this upward trajectory. In fact, short interest represents 15.1% of WU's float, and would take nearly three weeks to cover, at average daily trading volumes. This skepticism has been growing in the options pits, as well, as evidenced by yesterday's surge of buy-to-open put activity. A capitulation from some of the weaker bearish hands could help propel WU into new multi-year-high waters.


A Schaeffer's exclusive!

The Expert's Guide

Access your FREE trading earnings guide for Q3 before it's too late!


  
 
Special Offers from Schaeffer's Trading Partners