For as long as I can remember, I have always questioned the
status quo and the established way of looking at things.
If the majority is doing one thing, then it's my natural state
to think the opposite. But as you likely know, acontrarian attitude
isn't generally perceived in a positive way. But I was happy to
find out I'm not alone in theinvestment world.
Many successful investors are contrarians by nature. In fact,
being an investment contrarian can provide a huge edge. This is
because the majority of investors is often wrong.
Once the crowd gets excited about a particularstock , investment or
tactic, it's often a signal to do the opposite. The stockmarket has
an uncanny knack for attracting the most possiblemoney into an idea
or stock right before a sharp change in direction causes many to
take a loss.
And one way I take advantage of my contrarian nature is by
locatingstocks with heavy short interest.
Short interest is the total number ofshares that have been sold
short. Therefore, the higher the short interest, the more investors
arebearish on the stock. High short interest is generally believed
to be a bearish indicator. However, I have discovered that stocks
with a high short interest tend to outperform their brethren during
an uptrend. This is particularly true when short interest climbs
along with the stock price.
I created a screen to locate stocks that fit this criterion and
the result revealed two interesting picks…
1. SouFun Holdings (
This company is in thereal estate technology sector and operates
the largest real estate information website in China. Short
interest has ramped up from just under 800,000 shares to nearly 3
million from March to December 2012. This increasing short interest
comes despite a 17% increase inrevenue to more than $127 million
from $109 million last quarter year-over-year. The company provides
an annualdividend yield of more than 7% and a nearly 32%profit
Clearly, the rising short interest is a bet that China's real
estate recoverywill fail. The facts are that the country just
posted its seventh straight month of rising home prices, so it
appears the Chinese real estate slowdown is over.
That's why, as short interest has increased, so has the stock
price. Shares have climbed from the $11 range in August 2012 to a
recent $28. I like this stock as a momentum play with a $35 a
share, 12-month target. But it's critical to keep in mind that
Chinese companies don't have the best record of
acceptableaccounting practices, which can lead to potential
2. Research in Motion (Nasdaq: RIMM)
I am not a fan of BlackBerry, but this beleaguered technology stock
has caught my eye. It has launched a comeback from the lows nearing
$6 a share in September to a recent $12. Short interest has
increased 36% to nearly 120 million shares at the same time as the
stock is bouncing higher. It's critical tonote this stock has
fallen nearly 90% during the past five years due to continual weak
financial reports, combined with heavy competition in the
However,bullish investors are betting the launch of the
BlackBerry 10 on Jan. 30 will turn the company around. This latest
iteration of the popular BlackBerry smartphone boasts a
revolutionary feature called the "Hub," which enables users to peak
at all their messages and notifications without leaving the active
In addition, the phone will launch with more than 70,000
available apps, which may create serious competition for
Apple's (Nasdaq: AAPL)
iPhone. Not to mention the fact that Research in Motion's Chief
Marketing Officer Frank Boulben expects more than 200 carriers
tooffer the BlackBerry 10 by this summer.
There is heavy technical resistance at the $14 level and there's
much riding on the success of the BlackBerry 10. The new product
appears to offer revolutionary functionality, but I am not quite
willing to take a long position just yet in the company. I would
wait for a daily breakout close above $14 to enter longs. Should
this occur, my 12-monthupside target is $20 .
Risks to Consider:
My short-interest screening method simply identifies stocks
that have an increasing short interest while climbing higher. This
provides candidates for investment consideration. SouFun Holdings
has Chinese political andeconomic risk , not to mention potential
accounting issues. Long positions in Research in Motion are bets on
the new BlackBerry turning around the company's fortune. Although
these two stocks have proven short sellers wrong, it does notmean
their uptrends will continue. Always use stops and position size
Action to Take -->
I think the worst is over in China and things will continue to
improve, so SouFun Holdings is a good pick right now as a long
position. While Research in Motion appears to have an interesting
new BlackBerry in the pipeline, I prefer to wait and see attitude
on this stock. I willnot enter long before a breakout close above
resistance and only then with small size.
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