Keeping an eye on stocks that are being heavily shorted --
stocks with high short interest -- can be useful to traders.
Typically, short sellers will target companies with poor business
models, questionable accounting practices, or a combination of
Frequently, when a stock is so heavily shorted, the shorts
will wind up being correct and shares will fall -- eventually.
Even if a trader doesn't want to follow in with their own short
position, they could consider using high short interest as a
reason to exit their position in the stock.
On the other hand, stocks that are heavily shorted might see
short, powerful rallies. If a company defies the shorts and posts
incredible results, shares frequently see a large move to the
upside as shorts move to cover their positions; buying shares en
masse to limit their losses.
Here are a list of 10 heavily shorted stocks and why short
sellers might be interested in the names:
Barnes & Noble
): This book retailer has a short interest of more than 30
percent. Barnes & Noble is clearly facing secular headwinds,
as its largest competitor -- Borders Books -- exited the sector
last year due to bankruptcy. Amazon (NASDAQ:
) is able to offer books online at a cheaper price due to its
reduced overhead, and it has made the Kindle (and its digital
books) a household name.
However, Barnes & Noble has fought back against Amazon
with its own Nook lineup and digital store, and Microsoft
) gave the company a $300 million investment earlier in the
): As a business, Coinstar is more valuable for its Redbox kiosks
than the change machines from which the company derives its name.
Renowned short seller Jim Chanos named the company as one of his
targets earlier in 2012, explaining that demand for Redbox's
products (DVD rentals) would vanish as more and more consumers
opted to stream content directly to their homes.
Coinstar has a short interest of about 35 percent. The company
may be able to defy the odds if it can use its expertise in
vending machines to expand into markets; most recently, Coinstar
inked a deal with Starbucks (NASDAQ:
) for coffee vending machines.
): This shoe company owns a number of brands, but its performance
has largely been dominated by one in particular: UGGs. As UGG
boots gained in popularity, shares experienced a sustained rally,
gaining almost 10 fold from the beginning of 2009 to the
beginning of 2012. But, as with all matters of fashion, the
popularity of UGGs has wavered, and shares have been more than
cut in half this year.
Deckers Outdoor has a short interest of about 45 percent. The
company might bounce back if it could re-energize its UGG brand,
or perhaps another one of its brands could catch on.
) Shares of the solar panel manufacturer are down significantly
from its 2011 high. That said, short sellers must think there is
more room for shares to fall. First Solar short interest is
currently more than 45 percent.
Many of the alternative energy companies, including First
Solar, depend on government subsidies for much of their business.
With budgets around the world being squeezed, this funding could
increasingly dry up. There's also the issue of shale oil: U.S.
oil production is now expected to top Saudi Arabia's by 2020,
thereby lowering the impetus to switch to alternatives.
But, with President Obama winning a second term, it might be
too soon to dismiss alternative energy plays like First Solar.
Further, at these levels, the company might be fairly valued.
): The video game retailer has a short interest around 35
percent. The chain is facing a number of secular headwinds, as
video game players opt to order their games online or download
the games over the Internet. Overall, video games sold at retail
have been declining for months.
The company has attempted to diversify, working to develop a
used tablet business -- it has been refurbishing consoles for
years -- and has stepped into the mobile computing world.
): This could be a case of boom or bust. CEO Ron Johnson took
over in 2011 and began to immediately work to transform the
company. Unfortunately for him, and hedge fund manager Bill
Ackman (who owns a large stake), the turnaround has floundered.
Most recently, J.C. Penney posted a disappointing quarter, where
the company blew through much of their cash.
But Ackman stands by the retailer and Johnson's turnaround
plan. The ride might prove bumpy, but in the end, things might
work out -- Johnson's mall-within-a-mall concept certainly is
J.C. Penney has a short interest of around 30 percent.
): A major trend of 2012 has been the turnaround in the housing
market, and most certainly housing-related stocks. KB Home has
benefitted, as shares have more than doubled this year.
With a short float near 40 percent, some traders may be
thinking that the move is overdone at this point. In its last
earnings call, KB Home management detailed how it would work to
be aggressive, and how it believed that it the housing market
really has "turned."
Betting against KB Home may just be a broader bet against the
U.S. housing recovery.
): This tech manufacturer is an interesting short. The company is
in a sector that is experiencing growth (solid state drives), but
is highly shorted.
Much of the roughly 30.3 percent short interest might be due
to questions surrounding the company's accounting practices. Back
in August, OCZ had to delay its quarterly filing, and on
Wednesday, the company disclosed that it was being investigated
by the SEC.
Ultimately, the SEC might fail to discover anything
noteworthy. Also, the company has widely been thought to be
considered a takeover candidate, although it is hard to see why
another company would acquire OCZ during an SEC
): RadioShack, like Gamestop, is experiencing a secular decline
in the demand for its products. Short interest is around 37
percent, as traders may doubt the viability of its electronic
Still, RadioShack is almost 100 years old. Its name originates
from its original purpose: a store to sell radios and radio
equipment. Over those years, the company has shifted its model
and the goods it sells numerous times. Perhaps it is too soon to
count out this scrappy retailer.
): This headphone company has more short interest than any other
on this list, coming in at over 50 percent.
Short sellers may have fundamental problems with the company's
business model. Skullcandy is a publicly traded company that
sells stylish headphones. Producing headphones can no doubt be
profitable, but generally speaking, that sort of operation makes
up just one department of a larger company (Sony (NYSE:
), Apple (NASDAQ:
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.