2 Stocks To Short In Q3, According To Bank Of America

Stocks hit the skids on Thursday as investors grow increasingly concerned about the potential negative impact of a surge in U.S. COVID-19 infections.

For investors who believe Thursday’s sell-off is the beginning of a longer-term downtrend, Bank of America recently released their top 10 high-conviction trading ideas for the third quarter and two of them are short selling ideas.

Autodesk Growth Slowing

Autodesk, Inc. ADSK has been a relative high-flyer in the market in 2020, gaining 32.9% year to date. However, analyst Kash Rangan said it's his top short-selling idea for the third quarter. Rangan said Autodesk is likely entering several years of slowing revenue growth, and he's projecting 12% growth in fiscal 2021 compared to 25% in fiscal 2020.

In addition, Rangan said Autodesk’s fiscal 2021 guidance is based on a sharp recovery in the second half of the year.
“Consensus estimates for $105mn of net new ARR in 2Q vs $30mn in 1Q may prove too lofty amid expected pressure in multi-year deals, lower renewal rates, and weak new business close rates,” he wrote in a note.

Given slowing growth trajectory, lack of near-term catalysts and COVID-19 overhangs, Rangan is bearish in the stock.

Bank of America has an Underperform rating and $143 price target for ADSK stock.

Difficult To Justify ON Semi Valuation

In addition to Autodesk, Bank of America’s other high-conviction third-quarter short-selling idea is ON Semiconductor Corp ON.

Unlike Autodesk, ON shares have performed poorly in 2020, and analyst Vivek Arya said investors can expect more of the same in the third quarter. Arya said investors are expecting a sharp recovery from semiconductor stocks in the second half of the year. At its current price, Arya said it will be difficult to justify earnings multiple expansion given the company’s lack of near-term margin expansion opportunities.

“Third, ON’s balance sheet is inflexible with ($7) of net cash/shr and 2.5x debt leverage, with no room for buybacks/dividend payments to shareholders (unlike most peers which return both) and with greater uncertainty for FCF generation (indeed COVID-19 headwinds were enough to drive ON to be FCF negative, albeit for a limited period of time),” Arya wrote.

Bank of America has an Underperform rating and $14 price target for ON stock.

Benzinga’s Take

In the event of a significant correction in an overvalued market, the most overvalued stocks have the furthest to fall. Bank of America’s price targets suggest 28.1% potential downside for ON shares and 41.4% downside for Autodesk shares.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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