Being a short seller always has been a risky proposition, because of the unlimited loss potential. For investors that buy and are long stocks, or any other financial instrument, the worst case scenario is that a position can go to zero from its purchase point. For the short seller, there is no downside limit like that, and the potential for losses can be bottomless.
A recent Jefferies research report on hedge fund holdings from Steven DeSanctis and his team offers some good insight into the positioning at the major funds. The report noted this when discussing the long versus short tug-of-war:
Long-only investors have seemed to get the upper hand of late, as those names that are Short by Hedge Funds but “crowded” by Long-only investors have rebounded sharply from the low. Also, the S&P 500 has risen 44% from the March low, and thus it is very hard to be Net Short anything and thus names that are Short or moved into that position, have jumped. We do think that the market is range bound, thus we will see differentiation between stocks and shorting names will make a comeback.
The five biggest hedge fund short positions probably will not surprise market veterans and savvy traders as some have run incredibly hard and have worn out those betting on a big downside move.
This is a top telecom and entertainment play. AT&T Inc. (NYSE: T) is the largest U.S. telecom company and provides wireless and wireline service to retail, enterprise and wholesale customers. The company’s wireless network serves approximately 124 million mobile connections, with 77 million postpaid subscribers.
While AT&T’s traditional wireline voice business has undergone a period of secular decline due to wireless substitution and cable competition, the company through WarnerMedia has become a diversified media and entertainment business.
The company said back in May it would immediately abandon Venezuela’s pay-TV market as U.S. sanctions prohibit its DirecTV platform from broadcasting channels that the socialist administration of Nicolas Maduro required it to carry. AT&T is the largest player in Venezuela’s pay-TV market and was one of the last major American companies still operating in the crisis-wracked country.
The theme for AT&T short-sellers for years has been the company’s massive load of debt, and some of that has been unwound through spin-offs and sales. AT&T already held a heavy debt load, holding more than $150 billion in debt at the end of 2019. It entered into a $5.5 billion term loan agreement in May to give it “financial flexibility” amid the pandemic, which once again, added to the debt.
Investors receive a 6.97% dividend, which short-sellers are responsible for when shorting the shares. The consensus price target across Wall Street is $32.50. AT&T stock closed trading on Friday below that level at $29.58.
The energy giant is trading at levels that are higher than the March lows, but short sellers have stood their ground. Exxon Mobil Corp. (NYSE: XOM) is the world’s largest international integrated oil and gas company. It explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa and elsewhere.
Exxon also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products, and it transports and sells crude oil, natural gas and petroleum products.
This was an outstanding short earlier in the year, especially when oil futures cratered to literally below zero, but one would think hedge funds are keeping a close eye on this position because if the economy opens up even some, the benchmark price could go back above the $50 level or higher.
Investors receive an 8.27% dividend, which probably will continue to be defended and short sellers have to pay. The consensus target is $47.38. Exxon Mobil stock closed at $42.08 on Friday.