In early June, Ion Geophysical Corp. (IO, Financial) has the highest level of short interest according to the High Short Interest screener. Due to the high short interest and other warning signs, gurus are trimming or eliminating their positions in Ion Geophysical and other energy stocks.
Declining oil prices torment energy companies
Although oil prices have slightly increased in the past few months, they are still near deeply low values. During the past three years, oil prices experienced two sharp declines: in the second half of 2014 and throughout late 2015 to early 2016. Consequently, many energy companies, especially those in the oil and gas subsector, are directly affected by the decreasing oil prices.
As oil prices decline, many gurus are trimming their positions in energy stocks. During the past six months, 12 energy stocks have been sold by multiple gurus, according to the consensus picks screener. Among these stocks, Ion Geophysical has been sold by five gurus; although three gurus currently own the stock, their combined weighting is 0%. Nine of these stocks have a combined weighting of 0, suggesting that gurus are eliminating their positions in energy stocks.
With 40 buys and 47 sells, the oil and gas – services subsector currently has the sixth-highest number of net sells, according to the aggregate trend of gurus.
A “fallen angel”: energy company in distress as financials continue to decline
Founded in 1968, Ion Geophysical provides geophysical products and services to the oil and gas industry. Historically, Ion Geophysical experienced very high stock price increases, peaking near $600 per share in 1997. The geophysical company traded near $250 per share immediately before the 2008 financial crisis, but the price decreased 90% when the crisis hit. Although the stock price climbed back to $250 per share in 2012, Ion’s stock price steadily declined since 2012 and is now trading below $10 per share.
The geophysical company experienced high Altman Z and Piotroski F scores during the past 10 years, suggesting a strong financial outlook. However, the company suffered from declining oil prices and currently has a weak financial strength rating of 3 out of 10. To make matters worse, Ion Geophysical currently has a very high short interest of float, a big warning sign (feature announcement) that the company may go bankrupt. Additionally, the company has very low insider ownership: just 15.52% of insiders currently own this stock.
In early February, Ion Geophysical’s short interest sharply increased: the short interest went from 10.86% to 167.02% in just two weeks. Decreasing oil prices and potential financial downside likely caused investors to short the stock, increasing the amount of short positions uncovered. The high short interest puts pressure on the stock price, which has gradually decreased throughout the year. As the stock price declines, Ion Geophysical has contracting operating margins, which are currently negative and lower than 80% of companies in the global oil and gas equipment and services industry.
In recent years, the geophysical company has had decreasing equity-to-asset ratios, suggesting that Ion Geophysical is taking on larger amounts of debt. The firm’s current equity-to-asset ratio is only 0.20, which is lower than 86% of global oil and gas stocks. Additionally, Ion Geophysical has a very low ROIC compared to its WACC, and the company’s three-year revenue growth is lower than 87% of companies in its sector.
Due to the weakened financial outlook of Ion Geophysical, guru investor Paul Tudor Jones (Trades, Portfolio) has eliminated his position in this stock during the past quarter.
Gurus trim energy stock position as company appears to falter
On May 11, Richard Snow (Trades, Portfolio) decreased his position in Carbo Ceramics Inc. (CRR, Financial) by 62.2%, removing 0.43% from his total capital. Like Ion Geophysical, Carbo Ceramics experienced net losses as oil prices declined in the past three years.
The management at Carbo Ceramics cited a few reasons why the company had a poor performance in its recent 10-K. As oil prices continue to decline, demand for proppant is likely to decrease, driving down proppant prices. These likely resulted in a 66% revenue decrease from 2014 to 2015. Additionally, Carbo Ceramics suffered a $43.7 million impairment charge in the fourth quarter of 2015 due to weakening market conditions.
Although Carbo Ceramics had slightly higher returns on equity than Ion Geophysical did during the past 10 years, Carbo Ceramics currently has a worse ROE. With a current ROE of -15.42% and an operating margin of -65.62%, the 1987 ceramic proppant company has a weakening profitability outlook.
Despite the contracting revenue per share, Carbo Ceramics has a stronger financial outlook than Ion Geophysical does, probably because the company has a healthy equity-to-asset ratio of 0.82. The ceramic proppant firm’s equity-to-asset ratio is currently higher than 87% of companies in the global oil and gas equipment and services industry. Additionally, Carbo Ceramics has a steady equity-to-asset ratio, while Ion Geophysical’s equity-to-asset ratio has been more volatile in the past 10 years.
In addition to having a high short interest of float, Carbo Ceramics has increasing day sales outstanding (DSO), suggesting that customers are losing faith in the company’s business. Although the company sharply decreased its DSO in 2008, the company’s DSO generally increased year over year from 2009 to 2015. These warning signs increase the likelihood of Carbo Ceramics going bankrupt in the short term.
Although the company may have a strong financial outlook, Carbo Ceramics currently has a Piotroski F-score of just 3 out of 10, suggesting that the company has a weak business operation and is likely unsustainable. Historically, Carbo Ceramics had a relatively strong F-score; however, the ceramic proppant firm’s F-score has decreased since reaching a peak in 2011.
As the ceramic proppant company experiences weakening financials, many gurus have trimmed their positions in Carbo Ceramics. During the past quarter, Steven Cohen (Trades, Portfolio) eliminated his Carbo Ceramics position, selling his 287,300 shares at an average price of $17.25. The investor at Point72 Asset Management realized a 7% loss on this stock. Additionally, Jim Simons (Trades, Portfolio) reduced his Carbo Ceramics position by 62.57%.
See also
On the guru trades page, there is a box summarizing the key statistics of the stock: market cap, EV, valuation ratios, profitability ratios and other key metrics of the company. This module allows users to get a quick summary of the stock and which gurus are buying and selling the stock on the same Web page.
For other stocks with high short interest, use the All-in-One Screener. You can try to investigate the following: is high short interest always bad?
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