We recently compiled a list of the 10 Best Affordable Stocks Under $40 According to Short Sellers. In this article, we are going to take a look at where JD.com, Inc. (NASDAQ:JD) stands against the other affordable stocks under $40.

Several traders tend to profit from stocks through appreciation. However, some do the opposite-- their idea is to profit from stocks when their value declines. This happens through a strategy known as short selling. In simple words, short selling means borrowing a security whose price is expected to fall and then selling it in an open market. Later, the trader buys that same stock back, hopefully at a lower price than initially sold for. The trader then returns the borrowed stock to the broker and pockets the difference.

Short interest serves as a barometer of investor sentiment towards a stock, sector, or market. Short interest represents the number of shares that have been sold short and are still outstanding. Since short sellers tend to benefit from the decline in the stock price, rising short interest generally signals higher negative investor sentiment. On the other hand, declining short interest means investors are becoming less bearish.

Short Sellers Made Fortunes Despite S&P 500 Touching Record Highs

Bloomberg reported that short sellers saw a strong 2Q 2024, despite the broader market touching record highs.

Over the past 6 months, the S&P 500 saw an increase of over ~11%. How did the short sellers make money in this environment? Short sellers amassed about $10 billion in paper profits during 2Q 2024.

The paper earnings from sectors like industrials, health care, and financials were able to offset the $15.7 billion mark-to-market losses experienced in technology.

This means that investors continue to flock to just a few mega-cap technology stocks amid a challenging macroeconomic backdrop. Therefore, there were some areas of weakness in other sectors. During the quarter ended 28 June, the tech-heavy Nasdaq 100 Index saw an increase of over ~7%. Meanwhile, the energy sector witnessed the most short covering during 2Q 2024.

Short Sellers Saw Record Weekly Profits Due to Broad-Based Tech Decline

While the short sellers saw losses in 2Q 2024 as a result of broad-based buying in the technology stocks, the group was able to pocket some gains in early April 2024. Reuters reported that traders who bet against the "Mag 7" group of the US technology stocks were able to book their biggest-ever weekly profit of over $10 billion in mid-April. During that time, the tech-heavy Nasdaq Composite Index and S&P 500 saw 6 straight sessions of declines as there was high inflation and evidence of resilience in the US economy. As a result, the rate cut hopes were hampered, benefiting the group of short sellers.

As per LSEG (London Stock Exchange Group plc) data, overall, Big Tech shed ~$1 trillion in their market cap.

Short Bets Have Now Declined, Large Bank Says

JPMorgan believes that consecutive highs in the broader US stock market turned short selling into a difficult trade. Therefore, the bets against the US indexes have now tumbled. The declining short interest continues to provide steady support to the US equities, helping to suppress volatility. Experts opine that there are 3 critical factors, because of which it was difficult to bet against the market situation.

Firstly, the short bets are expensive to maintain if the stock starts climbing, a risk that holds significance in today's bull run. The excitement around artificial intelligence (Al), the potential for rate cuts, and the state of the broader economy have all been factored in. Secondly, analysts believe that regulators have added restrictions to short selling, as they have mandated transparency and added costs to short sellers that target equities. Finally, the industry players continue to back out as they face a rising wall of participating retail investors.

Our methodology

To compile the list of 10 Best Affordable Stocks Under $40 according to short sellers, we used the Finviz screener and shortlisted the stocks with prices less than $40. Then, we selected the stocks that have a forward P/E multiple of less than ~22.40x (since the broader market trades at a forward P/E of ~22.40x). Finally, we picked stocks that were the most popular among hedge funds and had low short interest. The stocks are ranked in descending order of their short interest.

At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. 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 wide and imposing view of a supply chain distribution center, illustrating the company's technology capabilities.

JD.com, Inc. (NASDAQ:JD)

Forward P/E Ratio as of 26 August: 7.55x Share Price as of 26 August: $25.80 Number of Hedge Fund Holders: 59 Short % of Shares Outstanding (31 July 2024): 1.89% JD.com, Inc. (NASDAQ:JD) is an online direct sales company in China. It provides a wide selection of products through its website and mobile applications. In the medium term, JD.com, Inc. (NASDAQ:JD) is expected to see stable margins. This comes after the firm cut its unprofitable businesses like community group purchase, Jingxi, and international businesses in 2022. The company is expected to focus on high-quality profitability rather than low-quality growth. Over the long term, JD.com, Inc. (NASDAQ:JD) is expected to see expansion in its margins as a result of increasing scale from 1P and 3P businesses. A larger scale in each category should increase its bargaining power with suppliers. Since 2016, the company has no longer been fully reinvesting the gains from improved scale. It is focused on delivering annual margin expansion over the long run. Therefore, the increase in mix from higher-margin third-party platform businesses together with efficiency of scale should help in lifting its margins. In 2Q 2024, JD.com, Inc. (NASDAQ:JD)’s total revenues saw an increase of 1.2% YoY to US$140.1 billion. The company navigated a high base in the electronics and home appliances category from last year, with growth in its general merchandise category, mainly supermarkets, remaining robust. The shares of JD.com, Inc. (NASDAQ:JD) were upgraded by analysts at JPMorgan Chase & Co. from a “Neutral” rating to an “Overweight” rating. They gave a price target of $36.00, up from $33.00 on 16^th August 2024. Additionally, 59 hedge funds held stakes in the company as of the end of the second quarter, according to the Insider Monkey database. Ariel Investments, an investment management company, released its first-quarter 2024 investor letter and mentioned JD.com, Inc. (NASDAQ:JD). Here is what the fund said:

Overall JD ranks 9th on our list of the best affordable stocks under $40 according to short sellers. While we acknowledge the potential of JD as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than JD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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