Short positions against the so-called FAANG group of the largest U.S. technology stocks have surged by more than 40 per cent in the past year as investors bet against some of the biggest drivers of the global bull market.
Bearish investors have shorted about $37-billion worth of stocks in the group, which comprises Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc., up 42 per cent from a year ago. Amazon leads the way with almost $10-billion in short interest, according to data compiled by Bloomberg as of Aug. 28 from financial analytics firm S3 Partners LLC.
“Tech stocks have had a large run-up in price this year,” Ihor Dusaniwsky, head of research at S3 Partners, said in an email. “The greater the rise, the greater the fall so they are being targeted as the stocks to short. With the bull market possibly entering the backstretch, portfolio managers are bracing for a selloff and increasing their overall market short exposure.”
Investors are piling into FAANG shorts as U.S. stocks continue to breach new records, with the Nasdaq Composite Index surging above 8,000 for the first time Tuesday. The group has accounted for 48 per cent of the index’s advance this year, according to data compiled by Bloomberg.
Tech companies overall make up half of the 10 largest short-interest positions in the world, with Chinese e-commerce giant Alibaba Group Holding Ltd. at the top of the list with almost $19-billion worth of stocks short. That is more than double the 19-per-cent weighting the sector has in the MSCI All-Country World Index of the world’s largest developed and developing market stocks.
One of the biggest non-tech positions on the list is Tesla Inc., which has become a magnet for bearish bets as founder Elon Musk briefly considered taking the electric car maker private before pulling the plug on the idea. Insurer Ping An Insurance Co. of China Ltd. is the highest-ranked non-tech name in the group, the data show.
Here’s why investors may be souring on some of the most successful market plays of the past few years:
Alphabet (18-per-cent stock gain year-to-date)
Bears are on alert with Google now trying to get back into China, almost 10 years after exiting the world’s second-largest economy over political censorship concerns. The parent of Google and the rest of the FAANG cohort have already seen selloffs this year as investors questioned the persistent rally in the shares, as well as increasing privacy and censorship concerns that have arisen amid an investigation into possible Russian meddling in the U.S. election.
Alibaba (up 3 per cent)
It’s been an up-and-down year for Alibaba, with the stock little changed as the Chinese e-commerce giant has pulled back its presence in Silicon Valley amid escalating trade tensions between the U.S. and China. Currently Alibaba’s focus includes its Ele.me food delivery platform, which competes against Tencent-backed rival Meituan Dianping. Both are incurring big losses as they fight for market share in China.
Ping An Insurance (down 7 per cent)
Insurance stocks in China have been under pressure this year as premium income has dropped and regulators move to curb financial risks, leaving an opening for bearish investors looking for further downside. In an August interview after the insurer reported its latest earnings, Ping An’s Chief Insurance Business Officer Lee Yuan Siong argued the company’s stock still doesn’t completely reflect the value of its technology segment, or its integrated financial services, which have helped the company dominate in China.
Tesla (0 per cent)
Where to start? Volatile electric car maker Tesla has been a lightning rod for bears all year, with Elon Musk clashing with analysts and short sellers while spending long hours at the factory struggling to ramp up production of the Model 3 sedan. Then Musk ignited a firestorm this month when he tweeted his plan to take the company private -- before scrapping the whole idea weeks later. It’s got investors and analysts questioning Musk’s health and stability, and the SEC probing his actions. In spite of all that, Tesla stock remains flat for the year.
Dang, turns out even Hitler was shorting Tesla stock … https://t.co/RLM1VQ5O3K
— Elon Musk (@elonmusk) August 5, 2018
Oh and uh short burn of the century comin soon. Flamethrowers should arrive just in time.
— Elon Musk (@elonmusk) May 4, 2018
Netflix (up 92 per cent)
Netflix looks like a prime target for short sellers with the streaming service still one of the top performers in the S&P 500 this year even after second-quarter earnings disappointed as net subscriber additions missed forecasts. The company “burns cash like a drunken sailor,” Michael Pachter, an analyst at Wedbush Securities Inc., said in a July interview. Pachter has a sell rating and $125 price target for Netflix -- a third of the stock’s current $368.49 level.
Facebook (0 per cent)
Shares of the social media giant look vulnerable as users have grown disenchanted with the platform amid public scandals over privacy and content. Facebook warned in July sales growth will continue to slow through the rest of the year. Mark Zuckerberg, CEO of Facebook, endured two days of grilling before Congress in April on the company’s privacy standards.
Amazon (up 65 per cent)
Shorts may be targeting the online retail giant because of its long-term success, as the stock has more than tripled over the past three years. While sales in the most recent quarter came in slightly below estimates, Amazon’s profitability has improved, generating more income in the first half of 2018 than the previous seven quarters combined. The company has also had to withstand frequent Twitter attacks from President Donald Trump.
Apple (up 30 per cent)
Short sellers may be betting the world’s largest company, which hit a $1 trillion market cap in August, will continue to struggle with plateauing global demand for smartphones as iPhone unit sales missed estimates last quarter while beating on price. Apple is looking to services and accessories for future growth as iPhone prices appear to have hit a ceiling.
Microsoft (up 29 per cent)
Markets have soured on Microsoft recently with the stock suffering its longest losing streak in a year in August as it detected and seized web domains created by cyber-attackers linked to the Russian military. Microsoft surged to a record in July after its latest earnings report and forecasts boosted confidence it will be able to increase cloud sales and squeeze more profit while also cutting into Amazon’s lead.
Takeda Pharmaceutical (down 28 per cent)
Short-sellers are keeping a close eye on the 237-year-old drugmaker as it seeks approvals from regulators around the world to complete its $62 billion acquisition of U.K.-listed Shire Plc, the biggest-ever overseas deal by a Japanese company. A small but vocal opposition group among shareholders has also voiced concerns over the risks the purchase poses to Takeda’s dividend and credit ratings.