By Noel Randewich
SAN FRANCISCO (Reuters) - A two-day rally in the lowly shares of Advanced Micro Devices (NASDAQ:AMD) Inc may be squeezing short sellers, who recently increased their bets against the chipmaker.
Once a plucky competitor to much larger Intel (NASDAQ:INTC) in chips for personal computers and servers, AMD is now struggling to expand into new growth markets and it has repeatedly fallen short of Wall Street's expectations.
The annual interest rate that short sellers pay to borrow shares of AMD surged from 4 percent to an unusually high 50 percent last week, according to SunGard's Astec Analytics, which tracks securities lending.
That rate tends to rise in line with demand from short sellers, who borrow and sell stocks they think will fall in price, hoping to make a profit by buying the stock back more cheaply later on. A significant percentage of stock in a short position indicates that investors expect it to drop in value.
The increased cost of borrowing AMD follows a recent leap in the number of AMD shares sold short. About 19.7 percent of AMD's shares outstanding were short sold in mid-July, the most recent data available, up from 15.1 percent at the end of June.
In the options market, bets against AMD have increased since mid-July. Currently, puts outnumber calls 2.4-to-1, the highest since Jan. 26, according to Trade Alert data.
But a strong two-day rebound in AMD shares from all-time lows may be pressuring some short sellers to close their bets to avoid losses.
AMD's stock was up 10.7 percent at $1.96 on Wednesday, adding to a 9 percent gain the day before, with no obvious catalyst driving the rebound.
AMD scores 86 out of 100 in a Starmine model predicting the likelihood of seeing such a short squeeze, considering volatility and availability of shares for borrowing.
Underscoring AMD's troubles, Moody's on Tuesday cut its corporate family rating on AMD to Caa1 from B3, signaling a very high credit risk. It pointed to the company's negative free-cash flow and operating losses in its PC-related business.
The company's low stock price has also stoked speculation it could be acquired. Reuters reported in June that AMD was in the initial stage of reviewing whether to split itself in two or spin off a business.
(Additioal reporting by Saqib Ahmed in New York; Editing by Steve Orlofsky)