3 Financial Stocks Short Sellers Are Banking On to Fail

Stocks to sell

This article examines some of the most shorted financial stocks on the market. More specifically, we’re looking at financial stocks short sellers are targeting that you may want to sell before it’s too late. The uncertain economic environment warrants analyzing financial stocks sold short by market participants, as a divergence is likely to occur.

Significant short selling of a stock generally means market participants believe it is overpriced. However, other rationales exist for short selling. For example, some market participants short-sell stocks to rebalance their exposure, while others short-sell stocks to borrow funds. Therefore, a holistic view of short selling is required before blindly assuming a stock is overpriced.

Considering the aforementioned, I screened through the most shorted financial stocks and subsequently assessed their prospects. Three stood out to me; let’s discuss each in depth.

Financial Stocks Short Sellers Are Targeting: B. Riley Financial Inc. (RILY)

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B. Riley Financial (NASDAQ:RILY) fills a critical void in the investment banking industry. In fact, I think its emphasis on liquidations and small-cap company investment banking is highly lucrative in today’s economy. However, market participants clearly disagree with me, as about 76% of RILY stock’s float is shorted.

Okay, so RILY stock is heavily shorted; now what?

Firstly, consider that RILY stock’s short interest is likely consequential to its near 30% month-over-month surge, which has driven its price-to-book ratio above 2.22x. In essence, this implies that investors are trimming their exposure instead of banking on fundamental weakness.

Regardless of the overarching rationale, I think investors are wrong to short RILY stock; here’s why.

B. Riley is positioned to benefit from a recovery in the investment banking arena. Although a private market observation, Ernst & Young expects distressed and restructuring private equity activity to top other categories in 2024. Such activity could relay into the liquidation space, handing B. Riley Financial lucrative opportunities. Furthermore, small-cap opportunities exist in digitalized finance, a rapidly growing industry with numerous corporate finance activities waiting in the wings.

In conclusion, I think things are looking up for RILY stock. Even though the company’s fourth-quarter revenue of $347 million dropped by 9.2% year-over-year (YOY), industry-based aspects suggest the firm will rebound this year. Moreover, the negative market consensus provides investors with an excellent contrarian investment opportunity.

Upstart Holdings (UPST)

Source: Piotr Swat / Shutterstock

It doesn’t get more cyclical than Upstart Holdings (NASDAQ:UPST). I mean, we are talking about a credit intermediary that relies on future credit scores instead of realized credit scores.

For those unaware, Upstart is an AI-driven credit intermediary that facilitates debt to consumers based on peripheral variables such as their education and career prospects. Although the firm’s business model is promising, the tight economic environment has suppressed speculative-grade credit offerings from banks while crunching the labor market.

A look at Upstart’s fourth-quarter earnings adds substance to the argument above. Despite beating its earnings-per-share target by 11 cents, Upstart’s loan originations settled at $1.3 billion, a 19% YOY decline. Additionally, Upstart forecast an $8 million net interest loss for its first quarter amid resilient funding costs.

Approximately 36.65% of UPST stock’s float is shorted, and its price-to-sales ratio of 4.02x doesn’t do it justice. On top of that, the shady economic environment will likely compress speculative loan volumes even further in the latter stages of 2024.

It’s not all sunshine and rainbows for UPST stock at the moment.

Hanover Bancorp, Inc. (HNVR)

Source: Hermin / Shutterstock.com

Hanover Bancorp (NASDAQ:HNVR) is another heavily shorted stock. HNVR stock has a 14-day relative strength index (RSI) of around 13, signaling investor pessimism. However, the question now becomes: Is HNVR stock oversold, or are investors being rational?

Although not exclusively bound to it, Hanover’s exposure to small business loans and mortgages is worrisome. According to S&P Global (NYSE:SPGI), speculative-grade debt interest coverage ratios are falling. Moreover, a pending interest rate pivot will likely relay into mortgage valuations because they’re positively correlated to interest rate levels.

Furthermore, an idiosyncratic vantage point of Hanover Bancorp paints a blurry picture. The bank recently filed a prospectus pertaining to a $50 mixed securities shelf offering, suggesting it has liquidity concerns. Additionally, Hanover Bancorp’s fourth-quarter earnings report communicated an earnings beat of 26 cents per share. Still, I fear that credit risk might spike in the latter stages of the year, sending its small business loans into a tizzy.

On a more positive note, HNVR stock’s price-to-book ratio of 0.55x conveys relative value, while its forward dividend yield of 2.76% adds a floor to its stock price. Nevertheless, I think a Hold rating is warranted here!

On the date of publication, Steve Booyens did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for institutional equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa. He holds an MSc in Investment Banking from Queen Mary – University of London. Furthermore, Steve has passed CFA Levels 1 & 2 and is working toward his Ph.D. in Finance. His articles are published on various reputable web pages such as Seeking Alpha, TipRanks, Yahoo Finance, and Benzinga. Steve’s articles on InvestorPlace form an interesting juxtaposition between mainstream opinion and objective theory. Readers can expect coverage on frequently traded stocks, REITs, fixed-income funds, CEFs, and ETFs.

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