U.S. Auto sales up, but investor sentiment remains negative

U.S. Auto sales increased at the fastest pace in September since April which could finally signal a turn in sentiment towards the second most shorted sector in the U.S, by utilization (lendable supply out on loan). Investors have grown increasingly negative towards the Automobiles and Components sector over the third quarter. Although average short interest is low at 1.7% of total shares, in contrast to the S&P average of 3%, it has increased by 50% in September. There are a number of stocks to look at including; Titan International Inc (NYSE:TWI), Tesla Motors (NASDAQ:TSLA), BorgWarner Inc (NYSE:BWA), General Motors (NYSE:GM), Geely Automobile Holdings (HKG:0175), Peugeot SA (EPA:UG), Fiat Spa (BIT:F), BMW (ETR:BMW) and Daimler (ETR:DAI).

Last week the Long Short Ratio for the U.S. Auto sector fell to its lowest level this year after peaking in May meaning investors are expecting trouble ahead. Longs outnumber shorts by just five times, which is almost 30% less than in May. Institutional ownership of funds who lend in the sector also fell to annual lows this week, having declined by a third since its peak in May.

U.S. Auto parts stocks make up 70% of the top 20 most shorted stocks in the sector

Of the top 20 most shorted global auto stocks, 70% are U.S. auto parts stocks. The top three most shorted are;

• Titan International Inc (NYSE:TWI) – The tire supplier has increased turnover forecasts after a promising third quarter performance but shorts remain bearish towards the stock having increased short interest to 25% of total shares over the quarter.

• Tesla Motors (NASDAQ:TSLA) – Interestingly, the electric car developer sees contrasting sentiment. Whilst the short interest has almost doubled in six months to unprecedented highs of 17.4% of total shares, institutional ownership has also consistently grown to 11% of total market cap’.

• BorgWarner Inc (NYSE:BWA) – Short interest stands at 15% of total shares but has been oscillating between 15% to 20% over the year as it tracks the share price. This indicated that there may be convertible arbitrage in play.

U.S. auto giants versus European autos

Most of the U.S. auto giants have convertible bonds in issue which clouds short interest levels. Ford (NYSE:F) is an example of this until recently when it redeemed many of them. Although movement in total stock on loan tracks the share price in Ford, short interest stands at 3% of total shares which is less than half of the levels seen last October. Institutional ownership of funds who lend remains high at 17% of market cap’, in a sector where the average is 8%, despite share price at annual lows.

General Motors (NYSE:GM) has been subject to increasing negative sentiment since its return this year. Short interest stands at a high of 2.5% of total shares, representing a fifth of the lendable supply. Although, institutional ownership has increased gradually, overall holdings stand at 9.8% of total shares.
30% of the most shorted 20 auto stocks are, in large, Japanese and European stocks.

Short interest in the Hong Kong listed, Geely Automobile Holdings (HKG:0175) peaked at 7.6% of total shares in August having appeared in our screen of stocks reaching new annual short interest highs since the start of the year. Short interest has since plateaued at 6.5% of total shares with almost all of the lendable supply out on loan. This bearish sentiment was not reflected by institutional owners until August, when total holdings fell by 30% to a low of 7% of total market cap’.

European car manufacturers, Peugeot SA (EPA:UG) and Fiat Spa (BIT:F) are also heavily shorted. Whilst the former sees short interest flat at 7% of total shares, Fiat Spa has seen a very large increase from 2% to 10% of total shares in just the third quarter. Share price is at an all time low and institutional investment has declined to less than a tenth of the market cap, also another low.

Short interest in BMW (ETR:BMW) and Daimler (ETR:DAI) remain flat at 2.5% and 55 of total shares, respectively.