Why AMD Short Sellers May Be Misguided, Particularly Against Intel

Any time that a stock is heavily shorted, investors can easily get spooked. It takes more guts and fiscal fortitude to bet against a company than most investors have. So, if many short sellers are betting against a company then it means something is bad — right? Not necessarily. Our take now is that short sellers in Advanced Micro Devices Inc. (NYSE: AMD) are either mistaken or they are using the company’s broken PC business model against Intel Corp. (NASDAQ: INTC) of yesteryear as their best argument.

24/7 Wall St. just identified the stocks with the highest number of shares held short, and AMD appeared on this list. This might just be enough to scare away traditional turnaround or value investors. There is a real possibility that this time truly is different and those short sellers are looking at a 2007 to 2012 AMD rather than the AMD of 2013 to 2016. The short interest in Intel at the end of June was actually down almost 5%.

These short sellers could — quite ironically — end up being the best allies of those investors who are buying into the AMD turnaround. Remember, when short sellers exit a stock they have to buy the stock. This could create a serious short squeeze if and when they decide to exit.

AMD’s short interest rose by about 2.5% to more than 111.69 million shares by the end of June. This was represented as about 18% of the stock’s float. It also followed a 5% increase in the number of shares short in the mid-June report. Interestingly enough, the days to cover fell to about four.

So, why does this not matter? Short sellers are supposed to be very smart and very well informed. Analysts have not been on board with AMD either. That adds credibility to the short sellers as well, right? Neither scenario seems correct this time around. The wild card in the days ahead is that we will know what AMD’s earnings report looks like this coming Thursday (July 17).

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As far as what analysts are looking for in AMD’s earnings, the Thomson Reuters consensus estimates are $0.02 in earnings per share (versus -$0.09 a year ago) and $1.44 billion in revenue (up 24% from a year ago). The coming quarter is shown to have a consensus of $0.07 per-share earnings (versus $0.04 a year ago) and a 7% revenue gain to $1.56 billion.

What 24/7 Wall St. wants to pass on to its readers is that this is the first time in maybe a decade that AMD’s turnaround seems solid. We had been extremely critical of the company in years past, but when things turn they really turn. AMD even made our own list of nine stocks that could double in 2014, back when AMD was around $3.50, implying that the stock could go up to as much as $7! AMD’s 52-week range is $3.04 to $4.65, and we have not backed off from our upside targets regardless of a significant outperformance against the market.

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