By Mark Hulbert
Apple shareholders need not worry that it’s the most-shorted U.S. stock. I’m referring to the report from short-seller analytics firm S3 Partners that, after 864 days in which Tesla /zigman2/quotes/203558040/lastsale TSLA -0.19% was at the top of this list, Apple /zigman2/quotes/202934861/composite AAPL -1.96% has acquired this dubious honor. As of Sept. 14, a total of $18.4 billion worth of Apple shares were sold short, eclipsing Tesla’s total of $17.4 billion. That certainly seems like a lot of money aggressively betting that Apple’s stock will fall.
Perhaps the first clue that Apple investors nevertheless need not worry comes from Tesla’s market-beating performance even though it topped the most-shorted list. Since April 2020 through Sept. 14, the stock produced a total return of more than 100% annualized, according to FactSet, versus 15% for the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.03% . Apple investors can only hope they outperform the market by as much during the time the company is the most-shorted.
Tesla is just one data point, of course. The better reason for Apple investors not to worry is that the sheer dollar amount of shares sold short is “pretty meaningless,” Jay Ritter told me in an email. Ritter is a finance professor at the University of Florida and co-author of one of the more cited academic studies on the investment implications of short interest . He added that he is not currently short Apple but is short Tesla.
In order for the short-interest data to be meaningful, it must be put in context. A large dollar amount of Apple shares may be sold short, but the company also has the largest market cap of any publicly traded company in the world. Among the more relevant short-selling metrics are the short-interest percentage (the number of shares sold short expressed as a percentage of the total number of shares outstanding) and the days-to-cover ratio (the number of shares sold short divided by average recent daily trading volume).
According to either of these two ratios, Apple is actually one of the least-shorted stocks. According to FactSet, in terms of the short-interest ratio Apple ranks in 477 place among the 500 stocks within the S&P 500. In terms of the days-to-cover ratio, it ranks in 463 place. In other words, what the headlines trumpeted as one thing is in fact precisely the opposite.
Might heavy shorting be bullish?
Some contrarians may be disappointed to learn that Apple’s short-interest rank is so low. That’s because they believe that high levels of shorting are actually bullish.
The problem with this contrarian argument is that it’s wrong, according to Adam Reed, a finance professor at the University of North Carolina who is one of academia’s leading experts on the significance of the short-sale data. In an email, he told me that the strong consensus conclusion of numerous academic studies is that stocks proceed, on average, to underperform the market if they have high short-interest ratios.
He added that he is not aware of any academic research that has found the sheer dollar value of shares sold short to be correlated in any meaningful way with a stock’s subsequent performance.
The bottom line? Apple’s newly-attained first-place ranking in the most-shorted list is a lot of sound and fury, signifying nothing.