LendingTree (TREE) is loved by analysts, the company's stock traded up nearly 7% Monday and yet nearly half its shares are held short. What gives?
Oftentimes when a company attracts such a huge amount of short interest, it is usually easy to find out why. Short-sellers can be a vocal bunch, as being vocal sometimes helps their positions. Failing that, there is often at least one analyst who takes a bearish view. This has not been the case with LendingTree: Of 11 analysts surveyed by Bloomberg, all have the equivalent of a buy rating on the company.
From the analysts Real Money spoke with as well as LendingTree's CEO, it appears that confusion and broader economic uncertainty is driving the shorts.
"At various points in time there have been misperceptions about LendingTree," CEO Doug Lebda said Monday in an interview with Real Money.
Among the misperceptions LendingTree faces is that it is a lender. (It is not; it is a matchmaker between borrowers and lenders.) Another popular misperception is that the company's mortgage business will be at risk when rates rise under the assumption that fewer borrowers will look to take out mortgages. Finally, the stock's meteoric rise last year may have given shorts a reason to pile in.
On the first point, LendingTree may be facing direct and collateral damage from the similarly named Lending Club (LC), which has been under fire due to questionable lending practices that occurred under its recently ousted CEO. Lending Club has been one of the lenders in LendingTree's network and troubles in Lending Club's business could put pressure on LendingTree's revenue.
"In the personal loan segment, they've seen a real halting of activity in the wake of Lending Club," Mark Mahaney, an analyst with RBC Capital Markets, told Real Money on Monday. "Not on the part of borrowers but on the part of investors; they hit the air pocket in terms of fund or investor interest in buying portfolios of personal loans."
The more pervasive perceived risk is that LendingTree will be hurt if and when interest rates rise.
"There is a misperception that when rates rise or when mortgages slow down, LendingTree doesn't do as well," Lebda said. "Over the last five years as mortgage originations have gone down, our mortgage revenue has more than doubled."
Indeed, in LendingTree's first-quarter earnings release, the company reported a 49% increase in revenue from mortgage products compared to the year-ago-quarter. This occurred as mortgage originations increased 4% year over year, according to data provided by the Mortgage Bankers Association.
"It seems that some investors or some of the people that aren't sure about what LendingTree does think that if mortgage applications are going down, then LendingTree also must suffer," Kerry Rice, an analyst at Needham & Company, told Real Money Monday. "Or, maybe what's been more topical is if interest rates increase and mortgage volumes come down, than that would be detrimental to LendingTree."
Lebda posits the opposite scenario in a rising rate environment and uses the online travel industry to make his point.
"If a hotel can fill all of its rooms at full price, they don't need Priceline or Expedia. Same thing is true with mortgage companies," Lebda said. "If they have over the short term a certain amount of capacity, a certain amount of people and a certain amount of loans they can close in a month or a week and they can fulfill all of their capacity for free, then they don't need a company like LendingTree. But when rates rise or when originations slow, they need companies like LendingTree more than ever and we become a great supplement to their own marketing efforts."
The third reason the shorts may be piling in appears to have more to do with market gyrations than with fundamentals. Shares of LendingTree are up nearly 5% over the last 12 months; however, the stock traded near $140 a share during that period. Today's closing price was $76.96.
"There was a monster rise in the stock last year, and so, in part, people look to short stuff that dramatically outperformed and this stock certainly was one of them," Mahaney said.
Despite the shorts, Lebda maintains conviction in his company and its health through all market cycles.
"I've been running a public company now for 20 years and at various points of time, short interest is high and it's low and I have no problem with people shorting our stock and I look forward to the day when I prove them wrong," Lebda said.