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), and WeWork Inc. (WE), 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.
Furthermore, the services sector slowed more than expected last month as the ISM services purchasing managers’ index dropped to 51.2, the lowest level in nearly three years. Prominent signs of a slowdown in economic growth and fallout from financial-market tensions are fueling recession fears lately.
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, and WE could be wise.
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.
FOUR’s POWR Ratings reflect this weak outlook. It has an overall rating of D, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has a D grade for Value, Quality, Momentum, and Stability. It is ranked #69 out of 80 stocks in the Technology-Services industry. Click here to see additional ratings of FOUR (Growth and Sentiment).
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.
CHPT’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of F, translating to a Strong Sell in our proprietary rating system.
CHPT has an F grade for Stability and Value. The stock also has a D grade for Quality. It is ranked #79 of 89 stocks in the Industrial – Equipment industry.
To see CHPT’s POWR Ratings for Growth, Sentiment, and Momentum, click here.
WeWork Inc. (WE)
WE provides flexible workspace solutions to individuals and organizations. The company offers workstation and customized floor solutions; and amenities and services, including internet, private phone booths, high-speed business printers, and enhanced cleaning solutions. It also provides value-added services, business and technical solutions, payroll services, and IT equipment co-location solutions.
The stock has a short interest of 77.49 million and a short float of 12%.
In February 2023, WE extended the maturity of the Junior Tranche of its LC Facility from November 2023 to March 2025 and increased the facility from $350 million to $470 million.
In addition, in January, the company issued $250 million of Senior Secured Notes to an affiliate of Softbank Group Corp. pursuant to its existing Senior Secured Notes commitment. The notes mature in March 2025 and bear interest at 7.5% per annum, payable in cash. It reflects an increase in the company’s liabilities.
WE’s trailing 12-month EBIT margin of negative 53.96% compares to the 22.71% industry average. Furthermore, the stock’s trailing 12-month ROTA and ROTC of negative 11.39% and 3.98% compare to the respective industry averages of 2.11% and 2.07%.
For the fourth quarter that ended December 31, 2022, WE reported a loss from operations and a pre-tax loss of $581 million and $526 million, respectively. In addition, net loss attributable to WE and net loss per share attributable to Class A and Class B common stockholders came in at $454 million and $0.59, respectively.
Furthermore, as of December 31, 2022, the company’s cash and cash equivalents were $287 million, compared to $924 million as of December 31, 2021.
Analysts expect WE to report a loss per share of $0.34 for the first quarter that ended March 2023. In addition, the company is expected to incur massive losses for at least two fiscal years. The stock has slumped 44.1% over the past month and 75.4% over the past year to close the last trading session at $0.59.
WE’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to a Sell in our proprietary rating system.
WE has an F grade for Stability and a D for Sentiment and Quality. It is ranked #35 out of 40 stocks within the D-rated Real Estate Services industry.
In addition to the POWR Ratings I’ve highlighted, you can see WE’s Growth, Value, and Momentum ratings here.
Consider This Before Placing Your Next Trade…
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FOUR shares were trading at $74.01 per share on Tuesday morning, up $1.85 (+2.56%). Year-to-date, FOUR has gained 32.33%, versus a 7.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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