P/E Superstars – stocks with low short interest and racy multiples

This piece combines equity fundamentals with securities lending data to identify stocks with high Price/Earnings ratios and low short interest - our PE Superstars. We’ve used Capital IQ to screen the constituents of the NASDAQ 100 and to focus our attention on the shares with the 20 highest and lowest PE ratios. We then analyzed the level of short interest and institutional investor holdings across these two sets and contrasted this against the Index as a whole. In short, we see that short sellers target shares with high PE Ratios and avoid those with low PEs, and institutional investors are overweight shares with high PE Ratios. PE Superstars include: Amazon.com (NASDAQ:AMZN), Baidu (NASDAQ:BIDU), Wyyn Resorts (NASDAQ:WYNN), Citrix  (NASDAQ:CTXS) and Warner Chilcott (NASDAQ:WCRX).

According to Capital IQ, the NASDAQ 100 has a market cap weighted 12 month trailing PE Ratio of 21.2, with all the companies reporting a profit in the last 12 months, except three - Electronic Arts, Vertex Pharmaceuticals and Sears Holdings. Of these three shares, short interest is relatively low save for Sears which has 10.3% of its total shares outstanding on loan and has been a perennial fixture on our list of highly shorted US shares.

Average short interest across the NASDAQ 100 is 3.3% of the total shares – up 21% since the start of the recent turmoil in August. The holdings of institutional investors who lend their shares have increased by 4% in this period to 24.4% of the market cap, while the Index itself has declined by 5.7%.

The 20 shares with the lowest PE ratios have an average short interest of 2.1%, significantly below the index average, although it has increased by an average of 49% in the last six weeks. Yet within this group, we also find shares with relatively high short interest, including Garmin (NASDAQ:GRMN) and Research in Motion (NASDAQ:RIMM), with short interest representing 8.6% and 6.5% of the total shares respectively.

Institutional investors who lend their shares hold 22% of the shares in this group – which is over 2% below the overall Index average. This underweighting has also increased of late as the funds who lend have increased their holdings by less than the Index average in the last six weeks. The most underweighted stocks in the list include Garmin (NASDAQ:GRMN) and Teva Pharmaceutical (NASDAQ:TEVA) with 2.5% and 10.4% of their shares being held by funds who lend their shares.

Turning to the shares with the 20 highest PE ratios, the short interest on average represents 6% of total shares, much higher than the Index average of 3.3%. This number has also been rising faster than the index average with short sellers having increased their positions by 67% on average since August. Of these shares, the most heavily shorted include Illumina (NASDAQ:ILMN), Fastenal (NASDAQ:FAST) and Netflix (NASDAQ:NFLX) with 16%, 12% and 10.8% of shares outstanding on loan.

Short sellers are not unanimous in targeting high PE shares, with Amazon.com (NASDAQ:AMZN), Baidu (NASDAQ:BIDU), Wyyn Resorts (NASDAQ:WYNN), Citrix (NASDAQ:CTXS) and Warner Chilcott (NASDAQ:WCRX)all seeing less than 2% of their shares out on loan. We have deemed this group to be PE superstars – in recognition of optimistic fundamental valuations and low short interest.
 

On average, long only investors are overweight high PE shares, with 24.5% of shares being held by funds who lend. This number has also increased more than the Index average since the beginning of August.