It's always intriguing to look at the list of the most
heavily-shorted stocks. Many investors like to see which companies
are expected to tumble by various short-interest gauges. Owning
these stocks long-term can give pause, and perhaps a reason to sell
if short sellers' arguments appear to be on the mark. Other
investors use the list of the most heavily-shorted stocks to find
short candidates themselves. And that's a huge mistake. That's
because the most-heavily shorted stocks are often the biggest
gainers when major events come to pass.
We've seen this phenomenon again in recent days. On Tuesday
morning, April 10, distressed grocery chain
weighed-in with quarterly results. They were pretty bad, but
perhaps not as bad as the most aggressive short-sellers assumed.
These short sellers had been holding 73 million
in short accounts, making this the fourth most-shorted stock on the
New York Stock Exchange. That short interest equated to an
eye-popping 14 days' worth of trading
Simply delivering bad but not horrible
led investors to embark on massive short-covering. By the end of
trading on Thursday, shares had risen a hefty 23%. Some of that
upward spike surely came from short-sellers covering their position
by buying back borrowed stock. Roughly 10 million shares traded
hands daily going into the
, though that figure spiked to 38 million on the day results were
Later that day,
weighed in with results that were better than analysts had
forecasted. As the fifth most heavily-shorted stock on the
, it should come as no surprise that shares quickly zoomed higher
and are now up nearly 10% in the last few trading sessions.
The key takeaway: it might be wiser to see if heavily-shorted
stocks have more upside than the short-sellers might think. If so,
those shorts may unwittingly force shares up for you with all of
their buying efforts as they cover positions.
This is food for thought as we head into the teeth of the
. Here are some of the top targets for short sellers, and the
expected dates for them to report results.
Risks and rewards...
, another heavily-shorted grocer, also highlights the risk of
betting against such stocks. Rumors have swirled that the company
may get acquired, and these rumors appear to have little merit.
Still, just the rumor has likely spooked short-sellers, and shares
are now up for four straight sessions (at the time of this
To be sure, some companies appear to deserve to attention of
short-sellers. For example, I laid out the long-term threats in
place for video-game retailer
back in October 2011
, and though shares are off more than 10% since then (as the
broader market has moved steadily upward), recently released sales
data imply even worsening quarterly results in the periods ahead.
Sales of video games and consoles slid sharply in March, according
to NPD Group, and it's getting harder to see how this company can
earn more than $3 a share in fiscal (January) 2013 and 2014, as
analysts currently anticipate. Still, with such a huge short
position in place, it may be wiser to sell this stock (if you own
it long) and then short it outright.
Profiting from the "short squeeze "
If you want to angle to profit from a potential
, it makes sense to target stocks that have huge short positions in
relation to their daily trading volume (known as "days-to-cover").
These stocks include:
St. Joe (
, a real-estate concern, with 36 days to cover
• Briggs & Stratton (BGG)
, small engine maker, with 28 days to cover
Meredith Corp (MDP)
, a media firm, with 27 days to cover
merican Greetings (AM)
, which makes greeting cards with 26 days to cover.
[block:block=16]You should only look to go against short sellers
with these stocks if your own research provides a clear case that
business trends are OK and not in trouble as short sellers likely
Risks to Consider:
It only pays to focus on a potential short squeeze if you think
the market is going higher. A slumping market could well prove
these short-sellers right, even if they're wrong.
Action to Take -->
You should always check the size of the short position before
investing in any stock. If you're going long, then you'll want to
at least know what the shorts are thinking. And if you're thinking
of going short, tread very carefully, lest you get caught up in a
short squeeze if the total short position is already quite
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of AA in one or more if its "real money" portfolios.
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