Looking for high-yielding stocks? Wall Street might not be your best guide. Often, the most generous dividends come from companies facing challenges, and that’s where contrarian investors like us step in.
Today, we’re taking a microscopic look at five heavily shorted dividend stocks with yields ranging from 6.9% to a whopping 21.4%. But remember, just because the shorts are piling on doesn’t guarantee a “short squeeze” (where they’re forced to buy back shares, sending the price soaring).
We will uncover back the layers to see if these “unloved” companies have the potential to turn things around.
1. Cracker Barrel Old Country Stores (CBRL)
- Dividend Yield: 6.9%
- The Rough Patch: CBRL has lost a quarter of its value since April 2023, with recent revenue growth stalling at 0.2%. While cost-cutting initiatives and a new rewards program offer a glimmer of hope, earnings per share (EPS) have dipped year-over-year, leading to a concerning P/E ratio of 23. Analyst ratings are mixed, with a price target of $140, implying potential upside but also reflecting continued volatility.
- Short Seller Concerns: Slowing foot traffic, rising labour costs, and competition from fast-casual chains are key worries for shorts. They also question the sustainability of the dividend given declining profitability.
- Catalysts: Successful implementation of cost-cutting measures, positive response to the new rewards program, menu innovations catering to evolving consumer preferences, and a potential rebound in casual dining traffic.
- Investment Thesis: While facing headwinds like slowing traffic and rising costs, CBRL offers a defensive play in the casual dining sector with a loyal customer base and a strong brand identity. Successful cost-cutting measures, menu innovation, and a positive response to the new rewards program could reignite growth and justify the current dividend. However, execution risk and competition remain concerns.
2. CVR Energy (CVI)
- Dividend Yield: 12.8%
- A Tempting Trap?: CVI’s generous yield might seem too good to miss, but debt-to-equity sits at a worrisome 2.5, indicating potential financial strain. While recent earnings show a rebound, driven by higher energy prices, profitability remains volatile. Analyst opinions are divided, with a price target of $28 suggesting limited upside compared to the significant risk.
- Short Seller Concerns: The volatile energy market and CVI’s high debt levels raise concerns about its ability to sustain its dividend in the long run. Additionally, some shorts are sceptical of the company’s recent acquisitions.
- Catalysts: Continued favourable energy prices, successful integration of recent acquisitions, and potential debt reduction initiatives could improve investor confidence.
- Investment Thesis: CVI’s high yield is enticing, but its debt levels raise red flags. However, if energy prices remain favourable and the company successfully integrates recent acquisitions, it could see improved profitability and sustain its generous dividend. This is a high-risk, high-reward play for investors comfortable with volatile markets.
3. Kohl’s (KSS)
- Dividend Yield: 7.6%
- Retail Rebound or Reality Check?: KSS’s recent rally has been fueled by share buybacks, but revenue continues to decline, raising concerns about long-term sustainability. The P/E ratio of 9.8 is low but reflects stagnant earnings growth. Analyst ratings are mostly bearish, with a price target of $30 highlighting the potential downside.
- Short Seller Concerns: KSS faces stiff competition from online retailers like Amazon and struggles to differentiate itself. Declining foot traffic and a lack of innovation are major concerns for shorts.
- Catalysts: Successful implementation of omnichannel strategies, partnerships with popular brands to attract younger demographics, and innovative store formats that enhance the shopping experience.
- Investment Thesis: KSS faces an uphill battle against online retail giants. However, the company’s low valuation and efforts to improve its omnichannel strategy offer the potential for a turnaround. Successful partnerships, innovative store formats, and attracting younger demographics could revitalize the business. This is a speculative play with significant execution risk.
4. SL Green Realty (SLG)
- Dividend Yield: 6.9%
- Falling Out of Favor?: SLG’s reliance on falling Treasury yields has impacted its performance, with occupancy rates dipping slightly. However, the company maintains a healthy debt-to-equity ratio of 0.7 and consistent dividend payouts. Analyst ratings are cautiously optimistic, with a price target of $80 suggesting modest potential growth.
- Short Seller Concerns: Rising interest rates could put pressure on SLG’s ability to refinance debt and acquire new properties. Additionally, some shorts believe the office market is oversupplied, particularly in suburban areas where SLG has a large presence.
- Catalysts: Continued strength in the primary office market, particularly in urban areas, successful leasing of new developments, and strategic acquisitions in high-growth markets.
- Investment Thesis: SLG offers a stable dividend and a healthy balance sheet. While rising interest rates pose a challenge, the company’s focus on the urban office market with strong fundamentals could provide long-term growth. This is an income-oriented investment with moderate upside potential.
5. Riley Financial (RILY):
- Dividend Yield: 21.4%
- High Risk, High Reward?: RILY’s massive dividend is fueled by aggressive acquisitions, raising concerns about long-term sustainability. Recent earnings missed analyst expectations, and the P/E ratio of 12.5 reflects this uncertainty. Analyst opinions are predominantly negative, with a price target of $14 highlighting the significant downside risk.
- Short Seller Concerns: RILY’s high dividend payout ratio and aggressive acquisition strategy have raised concerns about its financial stability. Additionally, ongoing investigations into the company’s business practices are further fueling short-seller interest.
- Catalysts: Successful integration of recent acquisitions without compromising financial health, positive outcomes from ongoing investigations, and a clear and sustainable plan for managing the high dividend payout ratio could rebuild investor confidence and trigger a short squeeze. However, these are highly speculative and carry significant risks.
- Investment Thesis: RILY’s massive dividend and aggressive acquisition strategy qualify it for high risk. However, a short squeeze is possible if the company successfully integrates its acquisitions, resolves ongoing investigations, and implements a sustainable dividend plan. This is a highly speculative investment with the potential for significant rewards or losses.
Bottom Line
These five companies all present unique investment opportunities with substantial risks. Carefully consider your risk tolerance and investment goals, and do your research before investing in any of these high-dividend, heavily shorted stocks. Remember, contrarian investing isn’t for the faint of heart, but for those willing to take calculated risks, the potential rewards can be significant.
