Most Shorted US Stocks Since Early November

As analysts debate the longevity of the AI-driven tech surge amid sky-high valuations, some stocks stand out since early November in how many traders are betting they will go down. Could they represent a selling probability, or are there signs of a short squeeze?

Top 5 Most Shorted Stocks with MarkCap > $10b

• Iren (IREN) 22% shorted
• Madrigal Pharmaceuticals (MDGL) 19% shorted
• Lumentum Holdings (LITE) 18% shorted
• IonQ (IONQ) 17% shorted
• Omnicom (OMC) 17% shorted

Short-selling at Year-to-Date Highs

Stock markets have experienced increased volatility this week amid uncertainty about the AI craze. Initially down after major tech companies reported, but resurgent in the last couple of days as bets that the Fed will cut rates have increased. As if to illustrate the concern, Michael Burry of "The Big Short" fame earlier this month made large bets that AI-backed tech stocks would fall. Stock gains have been hesitant, and the concurrent rise in gold suggests traders are hedging their bets on a stock market top. After all, the benchmark S&P 500's PE ratio is at 30, double the historical median and at levels only seen during the pandemic, the subprime crisis, and the dot-com bubble. Short selling has reached its highest level this month, concentrated in the tech sector and supported by institutional investors.

It's not just technicals. Economic factors are contributing to the negative sentiment. During the last earnings season, an unusually large number of Wall Street CEOs warned of a possible correction amid growing concerns that the US economy might slow this quarter and next. Softer consumer sentiment, amid stretched valuations and low liquidity, could affect tech stocks in particular. Reviewing the companies that have concentrated the largest amount of short interest unexpectedly between 11 and 25 of November reveals a disproportionate amount of tech firms, but also firms exposed to cryptocurrencies. Of course, there is always the flip side, that if the market powers higher through the end of the year, some of these smaller firms could see large gains amid a short squeeze.

Iren and the Data Centre Peak

The data centre operator's share price is up almost 400% this year, but it was even higher ahead of its fiscal Q1 earnings in early November. Back then, the share prices were up over 700% since the start of the year. Despite its EBITDA rising by more than 3,500%, earnings apparently disappointed investors. Although it has already corrected, it appears many traders expect the company to fall even further, given the high level of short interest. The company's PE ratio is relatively in line with the market at 28x.

Did Traders Get Overly Optimistic With Madrigal?

This small pharmaceutical company can be the odd one out of the general trend. Its share price nearly doubled after it began selling its key product, Rezdiffra, the first FDA-approved drug to treat a type of liver fibrosis known as MASH. It does the trick by reducing liver fat, but the drug itself is not approved for reducing body weight. The company has yet to generate a profit, and its operating costs still exceed revenue.

Lumentum Peaking With AI Demand

The company manufactures photonic products for optical networks that are used in telecommunications and, perhaps most relevant to its 267% stock surge, data centres. The company posted solid earnings in November, turning a profit for the first time. The company guides fantastic growth on the bottom line, predicting its fiscal Q2 earnings to jump to $1.30-1.50 from $0.05 in the first quarter. But that's based on the company rationalising the surge in demand, as revenue grew 58% over the last year and executives see a similar trajectory going forward. With a P/E ratio of 189x, traders might have gotten a little overenthusiastic about the company amid the AI craze, which might explain the growing number of short selling.