3 Industrial Stocks Short Sellers Are Hammering: Cracks in the Foundation?

There are some industrial stocks that short sellers are targeting heavily in April this year. Short sellers often target stocks they perceive to be overvalued or companies facing significant challenges or headwinds. By short selling, they stand to profit if the stock price drops as they can buy back the borrowed shares at a lower cost than what they sold them for initially. Thus, a high short interest can be both a warning sign and an opportunity, depending if you own or want to sell shares.

The industrial sector can be ripe for short sellers due to the cyclical nature of the sector. When the economy is going strong, these companies do well, and vice-versa. The issue arises when the market turns pessimistic, which can turn slight weaknesses of companies into reasons to dump the stock. Shorts can also target companies for other reasons, including poor fundamentals, high debt load or a bleak outlook for future performance, among others.

So here are three industrial stocks that short sellers are targeting heavily.

Purecycle Technologies (PCT)

Purecycle Technologies (NASDAQ:PCT) is focused on recycling polypropylene into virgin-like resin. The environmental services and equipment company has attracted short sellers, possibly due to doubts about its technology’s scalability or environmental impact.

Aside from these broader issues, PCT has undergone an “operational pause” this week with the CEO stating, “This pause will allow us to make improvements to our flagship facility based off what we learned during operations over the last three months. It’s those improvements that should help take us into the next phase of production.”

PCT is currently pre-revenue, and 43.12% of its total share float has been sold short at the time of writing. There are other cracks in PCT’s fundamentals. They include a high debt load and a net cash position of — $396.48 million or — $2.41 per share.

Troublingly, it burnt through $248.81 million within the last 12 months. It needs to double its cash and cash equivalents of $147.33 to stay solvent. Otherwise, it must either dilute shareholders to add to its growing pile of debt. 

Enovix (ENVX)

Enovix (NASDAQ:ENVX) specializes in the development and manufacture of advanced lithium-ion batteries. At the time of this writing, around 27.18% of its total float is being sold short.

In 2023, ENVX reported a significant year-over-year revenue increase, reaching $7.4 million in the fourth quarter, up from $1.1 million in Q4 2022. Despite this revenue growth, the company experienced a net loss of $59.98 million in Q4, reflecting the costs associated with scaling operations.

For 2024, ENVX projects Q1 revenue to be between $3.5 million and $4.5 million, with an adjusted EBITDA loss of $24 million to $31 million. 

Some concerns are brewing on the horizon for ENVX in terms of its financials. For one, it already has over 150 million shares outstanding. This may be an issue, as it has only around two years of cash and equivalents on its balance sheet if it maintains its same level of cash burn. Additionally, share dilution is possible, or it could add to its debt pile of $117 million.

Zynex (ZYXI)

Zynex (NASDAQ:ZYXI) is an advanced medical equipment and technology company known for developing noninvasive devices for pain management and rehabilitation.

ZYXI reported significant growth in its 2023 fiscal year, achieving a 17% increase in revenue to $184.3 million. For 2024, ZYXI has set ambitious targets, aiming for approximately 23% growth in total revenue, reaching around $227 million.

Manufacturers like ZYXI are considered industrials since they experience boom and bust cycles like the wider economy. Like others on this list, the prospects for ZYXI are bleak, according to the bears. They have sold 36.67% of its float short.

It should be noted that this reduction of shares coincided with a reduction of one of its investor’s holdings on Apr. 1. This may very well be coincidental.

Regardless, ZYXI’s issue could come from shares of it being overvalued. Its P/E ratio for instance, is 46 times earnings. It also had $18 million in EBITDA from $184 million in revenue over the last 12 months. The market could surmise that its valuation must come back down to earth. The company’s stock price has increased around 15% year to date.

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

Matthew started writing coverage of the financial markets during the crypto boom of 2017 and was also a team member of several fintech startups. He then started writing about Australian and U.S. equities for various publications. His work has appeared in MarketBeat, FXStreet, Cryptoslate, Seeking Alpha, and the New Scientist magazine, among others.

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