Short interest in Automatic Data Processing, Inc. (ADP US), business outsourcing solutions provider, has doubled since mid-May and hit a historical high of $1.5 billion yesterday. ADP is now the third largest short in the Data Processing and Outsourced Services sector behind Visa (V US) and Paypal (PYPL US) and had the largest one month increase in short interest for the sector.
Overall, short interest in the Data Processing & Outsourced Services sector has grown by $881 million over the last month, the seventh largest increase in the 173 sub-industry universe. With total short interest at $16.8 billion, it has now climbed to the sixth most shorted sub-industry behind Biotech ($32.6 billion), Internet Software ($22.8 billion), Semiconductors ($22.2 billion), Oil & Gas Exploration & Production ($19.4 billion) and Internet Retail ($18.4 billion).
Short sellers aren’t the only investors increasing their ADP positions, on July 27th ADP’s stock price rose 9.5% on news that Bill Ackman of Pershing Square Capital Mgt. was building a position in the company. ADP’s share price hit a year to date high on the following Monday, $118.91, and has since retreated slightly to $112.05 today.
Analysts are unsure about how much meat is left on ADP’s bones for an activist investor to maximize. According to Danyal Hussain of Morgan Stanley, there may only be limited upside for an already lean and cost conscious company running on all cylinders and already paying out a 2% dividend to shareholders. EPS growth looks to be flattening out and revenues may be close to topping out in an under 5% unemployment environment.
ADP short sellers are down $121 million on the year, but most of that loss ($118 million) occurred in the last month, primarily due to the Ackman’s investment speculation. Short sellers were only down $3 million in mark to market losses for the first half of 2017 so if the “Ackman boost” is discounted and ADP’s price valuation is once again based on fundamentals instead of star crossed momentum we may see a slide in stock price back to pre-July 27th levels. Bloomberg’s analyst recap shows 3 buys, 15 holds and 3 sells – if Ackman gets off his end of the see-saw, the “holds” and “sells” may tip ADP’s price the shorts way.
In a sector which is heavily shorted relative to all other sub-industries and with recent sector wide short interest growing at a greater than usual rate any misstep in ADP’s next quarterly earnings report may trigger more short selling and a further retreat off recent highs.
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Managing Director Predictive Analytics, S3 Partners
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