Should you chase short sellers, particularly in the energy business? That is what you have to ask yourself after a Credit Suisse report on the sector. Oil has remained above $100 a barrel most of this year, and Americans are starting to get used to the fact that $3-plus a gallon of gasoline is here to stay. With this high pricing, energy stocks have done well. In a new report from the Credit Suisse trading desk, the analysts highlighted a list of energy stocks that the institutions and sophisticated investors are shorting. It is a list you may want to review and see if you own any of the stocks being targeted.
Exxon Mobil Corp. (NYSE: XOM) leads the list when it comes to Wall Street dog-piling a short. The reasons cited are absolutely no growth in its overall business and poor execution on recent initiatives. The short thesis also stresses that the Exxon portfolio needs to be upgraded, and it totally missed out on huge new plays in East and West Africa. The Thomson/First Call price target for the stock is $95.50, with shares currently near $89. The low estimate is at $85. The stock pays a 2.9% dividend, which short sellers are responsible to cover.
All the variable rate, high-dividend refiners are being shorted heavily, especially by the hedge funds. While this can be an expensive short sale due to the high coverage on the distributions, it may be a very profitable angle. These refiners have to base their high payouts on current income from their operations. Should they have a poor quarter, they may have to drastically lower their payouts. This could cause a wave of selling as investors flee the stocks for more consistent dividends.
Alon USA Partners L.P. (NYSE: ALDW) had an awful second quarter, and it may be staring at a third quarter that looks the same. The consensus price target for the stock is $21, and the high estimate is $28. With the stock trading at just over $14, something doesn’t seem right. The stock pays a distribution of 20%.
CVR Refining L.P. (NYSE: CVRR) has had outage issues, and it also suffered through a poor second quarter. With U.S. production increasing and a ban on oil imports still in effect, there could be some toxic problems for the smaller refiners. The consensus price target is $29.50, and the high target is $36. The stock pays a 20.3% distribution.
Northern Tier Energy L.P. (NYSE: NTI) is looking at a cracking unit shutdown next month that really may hamper its ability to handle the payout, which the company already has had to cut substantially this year. The consensus price target for the stock is posted at $27. The stock pays a 14.1% distribution.
The Credit Suisse trading desk also highlighted Marathon Petroleum Corp. (NYSE: MPC) and PBF Energy Inc. (NYSE: PBF) as stocks the shorts were going after, as they expect both companies to have poor third-quarter results.
Offshore drillers are in the sights of the short-selling crew as well. The Credit Suisse desk sees the activity as part of a bifurcation trade against the stocks. They highlight the downtime expected as a result of transitioning from older fleets and equipment to new builds, which is very costly and time consuming.
Diamond Offshore Drilling Inc. (NYSE: DO), Ensco PLC (NYSE: ESV) and Transocean Ltd. (NYSE: RIG) are three stocks cited by Credit Suisse as being targeted by short sellers.
Be advised that not all heavily shorted stocks will plummet. In many cases they can rise on mediocre news due to short squeezes or when the shorts are forced to abandon their positions and cover. In the case of the highlighted stocks, the basic fundamentals of the sector are lousy. In the case of the refiners, until spreads widen out, the situation could remain bad for some time.