We recently compiled a list of the 10 Worst ADR Stocks To Buy According to Short Sellers. In this article, we are going to take a look at where Despegar.com (NYSE:DESP) stands against the other ADR stocks.

An American Depositary Receipt (ADR) is a certificate issued by a U.S. bank that represents shares of a foreign company. These certificates allow U.S. investors to buy shares in foreign companies as if they were regular U.S. stocks. ADRs make it easier for American investors to invest in foreign companies and help foreign companies attract investment from the U.S. without needing to go through the complicated process of listing directly on U.S. stock exchanges.

Despite benefits, less than 10% of large foreign companies list their shares in the U.S. First, some companies that don't list in the U.S. may already be valued at a high level, so they don’t see much-added benefit. Secondly, the owners and managers of these foreign companies (often families) might not want a U.S. listing because it could limit their control and ability to benefit personally from the company.

Shifting Tides & Global Opportunities

Alibaba's initial public offering (IPO) in 2014 was a landmark event, raising $25 billion in what was then the largest IPO in history. This success was part of a broader trend where numerous Chinese firms sought to list in the U.S., attracted by the potential for high valuations and access to global capital. Fast forward to recent years, and the picture has changed markedly. The once-vibrant market for Chinese IPOs on Wall Street has withered. In 2023, Chinese companies raised only about $580 million through U.S. listings, a dramatic drop compared to the previous years. This decline is exacerbated by geopolitical tensions between China and the U.S., which have created a challenging environment for Chinese firms seeking to go public abroad.

According to a report by the US-China Economic and Security Review Commission, there are approximately 256 Chinese firms on the New York Stock Exchange, NASDAQ, and NYSE American. However, the political and economic shift has impacted investor confidence and market performance. Notably, 11 Chinese firms, including prominent state-owned entities such as China Eastern Airlines and China Southern Airlines, have delisted from U.S. exchanges over the past year.

In the UK major companies such as Shell, are moving their listings to the U.S. markets as they tend to be valued higher in the U.S. than in the UK, which helps them raise more money and get better growth opportunities. Several factors such as Brexit, high interest rates, fewer tech companies, and a lack of domestic investors have contributed to this migration. More than 30 companies with a market capitalization of over $125 million are exiting the UK’s public equity markets. Thirteen companies have completed takeover bids, while 17 companies have delisted.

Given the weakness in the U.S. market, analysts forecast that now is a good time to invest in foreign stocks. Over the past 12 years, U.S. stocks have outperformed international stocks in 10 of those years, driven by a strong bull market. However, historically, international stocks have often outperformed, especially when the U.S. market isn’t as robust as it has been over the last decade. Morningstar data shows that international stocks outperformed in 60 of the 64 years when U.S. market returns were below 6%, and in all 45 years when returns were below 4%. During periods of U.S. market weakness, investors often seek growth opportunities abroad, which could position ADRs to outperform American stocks during the current bear market.

While the U.S. market has enjoyed a prolonged period of dominance, the shifting global landscape presents a compelling case for diversifying into international stocks. With geopolitical dynamics, economic uncertainty, and the potential for weaker U.S. market returns in the coming years, foreign companies offer growth opportunities that American stocks may struggle to match. With that in context let’s take a look at the 10 worst ADR stocks to buy according to short sellers.

Our Methodology

For this article, we used the Finviz stock screener to find the foreign companies listed in the US. From that list, we shortlisted companies that have the highest percentage of shares outstanding that were sold short as of September 18. The list is sorted in ascending order of their short float as of September 18.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A business person typing on a laptop in a hotel lobby emphasizing the comfort and sophistication of the company's travel offerings.

Despegar.com (NYSE:DESP)  

Short Interest as % of Shares Outstanding: 15.63%

Number of Hedge Fund Investors in Q2 2024: 24

Despegar.com (NYSE:DESP) online travel platform that operates in 19 countries in the Latin America region. The company operates through two primary segments: Air, which focuses on selling airline tickets, and Packages, Hotels, and Other Travel Products, which encompasses travel bundles, cruise tickets, and related offerings.

On August 15, Despegar.com (NYSE:DESP) entered a strategic alliance with World2Meet, the travel division of Spain’s Iberostar Group. As part of the agreement, World2Meet has acquired Despegar.com’s (NYSE:DESP) Destination Management Company (DMC), BDExperience. World2Meet will now be the preferred partner for destination services in Mexico and the Dominican Republic. This move allows the company to focus more on its core business and strengthen its growth strategy. Additionally, the company’s strategic emphasis on high-margin package sales and non-air revenue streams is expected to help the company navigate a challenging economic environment caused by the devaluation of currencies in the Latin America region.

Analysts forecast an improvement in gross margins, driven by cost reductions and the increased use of AI technology. Stronger cash flow is anticipated in the second half of 2024. While 15.63% of the company's shares are shorted, 24 hedge funds have maintained a bullish sentiment on the stock as of the second quarter with stakes worth $228.82 million. No Street Capital is the largest shareholder in the company, holding $38.36 million worth of stock as of June 30. Industry analysts maintain a consensus Buy rating, with an average price target of $17.50, representing a 31.86% upside potential from its current levels.

Overall DESP ranks 7th on our list of the worst ADR stocks to buy according to short sellers. While we acknowledge the potential of DESP as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DESP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

Disclosure: None. This article is originally published at Insider Monkey.