Shorting astock is considered one of the sexiest and most
complex moves on the Street.
Investors are dazzled by stories ofhedge fund titans such as
David Einhorn and John Paulson raking in billions, going against
the grain and taking aim at companies they believe areovervalued or
headed for a nose dive.
But in spite of the psychological attraction of being
acontrarian and bucking the masses, even the smartestmoney on the
Street struggles with shortinvestments .
Take
Herbalife (
HLF
)
for example. Short interest in the stock exploded higher from 20
millionshares in mid-December to an eye-popping 37 million shares
in the last week of 2012. This came after it was revealed that a
number of billion-dollar hedge funds, led by Bill Ackman, had
initiated a massive short position in the multi-level marketing
company.
As you can see in the chart below, the surge in short interest
coincided with the exact52-week low , triggering a hugeshort
squeeze that sent shares soaring to a 73% gain in less than a
month.
Although that is just one example, there is a very good reason
why it is so difficult to shortstocks . Historically, themarket has
spent alot more time going up than going down. You can see this
trend in the chart below, with the S&P 500 up 8,500% since
1950.
Although there can be large discrepancies between the
performance of an individual stock and the market, it's important
to remember that a rising tide lifts all boats, a factor that
supports gains in even the most overhyped and overvalued
stocks.
On thatnote , here is a list of the 10 most-shorted stocks in
the S&P 500.
Top 10 Most-Shorted Stocks in S&P 500
While there are good reasons many of these stocks are being
shorted, themarket is off to a great start in 2013, defying the
negativity and skeptics with more gains. And since thisbullish
trend is a threat to the most heavily-shorted stocks, there's now
an opportunity for investors to go long and make nice gains on
short squeezes.
Of the 10 stocks in the list above, two stocks are worth
considering as top investments -- a homebuilder and real-estate
development company because of its strong upward momentum and an
online video-streaming provider because of its strategic initiative
to move into new markets and redefine itsbusiness model .
Here they are...
Lennar Corp. (
LEN
)
There are undeniable signals of a recovery in the housing market,
with the S&P/Case-Shiller Home PriceIndex showing an impressive
gain of 3.4% from last year in its latest release.
That has fueled bullish sentiment in Lennar, which jumped an
eye-popping 86% in just the past 12 months. Take a look at the
chart below.
But with short interest spiking for this stock, it's clear
investors think Lennar has gotten ahead of itself. Although the
company's forward price-to-earnings (P/E ) ratio of 25 is well
ahead of its 10-year average of eight, it is directly in line with
its peer group.
Looking forward, analysts are projecting impressiveearnings
growth of 83% in 2013 and 33% in 2014. If Lennar simply holds its
current valuation, then this additional earnings growth would lift
shares to $56, a 36% increase from current levels.
Netflix Inc. (Nasdaq: NLFX)
Netflix has been on a rollercoaster ride in the past 18 months,
topping off above $300 and then crashing down to a little more than
$54, before recently rallying back above $100.
Thewave of volatility has been driven by a fairly violent
implosion in earnings, with analysts calling for earnings of just
40 cents a share in 2013, a huge drop from the $4.75 a share seen
in 2011. While this downward pressure in earnings may seem like a
deathblow at first glance, there's still good news.
The company is aggressively redefining itself and pursuing
highly lucrative, exclusive content deals. It recently inked a deal
with
The Walt Disney Co. (
DIS
)
that includes access to Pixar, Marvel and Disney titles. There's no
doubt Netflix is facing an uphill battle against intense
competition, but with millions of subscribers, incredible brand
recognition and huge short interest, some more good news on the
content side of the business could squeeze more shorts and easily
push shares back above $100.
Risks to Consider: There is a reason many of these stocks are
being shorted. Many are suffering from falling estimates and
growing competition. Although the market is on the upswing, a
downdraft in the S&P 500 over the debt ceiling would place
additional pressure on highly-shorted stocks.
Action to Take -->
Shorting stocks is difficult for even the most-skilled and
successful investors. And stocks with high levels of short interest
are more susceptible to short squeezes, which can send shares
soaring. Lennar and Netflix are being shorted for different reasons
right now, but with the market climbing higher, even stocks that
look overvalued and out of favor can surge in a big way.