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2/27/2013 11:37:04 AM
While investors who love a stock may be inclined to buy it, those that hate a stock may be inclined to short it.
The process of short selling may be one of the most misunderstood aspects of the stock market. In short selling, an investor borrows shares of a stock and sells them into the market, collecting the proceeds.
If the investor is able to buy back the stock at a later date for less than they the sold it for, they keep the difference as profit. Thus, stocks that are heavily shorted are said to be "hated" by market participants -- investors expect share prices to fall.
Usually high short interest coincides with some sort of headwind for the business or potential downside catalyst. Although heavily shorted stocks can often be great investments, it is important to understand why the market is so bearish before buying.
The following are eight of the most heavily shorted stocks in the market today and the reasons as to why investors are so bearish on these companies' prospects.
First Solar (NASDAQ: FSLR ) More than 30 percent of First Solar's shares have been sold short. Despite the bearish sentiment surrounding the name, First Solar had been rallying in recent months prior to the company's first-quarter earnings release on Tuesday.
On a longer term basis, First Solar shares have been crushed, with the stock falling better than 85 percent over the last five years. Shifting trends in the solar industry have weighed on both First Solar and its competitors.
Demand for the company's products is still heavily reliant on government subsidies. In this era of government budget cutting, First Solar has been forced to reduce capacity. Further, solar-panel prices dropped 31% in 2012.
Herbalife (NYSE: HLF ) - This stock is Wall Street's biggest battleground right now. Roughly 34 percent of Herbalife's shares have been sold short, and hedge fund manager Bill Ackman's Pershing Square Capital Management accounts for a large percentage of the short interest.
In December, Ackman publicly revealed that his firm was short around $1 billion worth of Herbalife shares at an investment conference. He said that the company was a "pyramid scheme" and that his price target for the stock was "$0." Subsequently, HLF fell sharply before quickly recovering as two prominent investors stepped up to take the other side of Ackman's trade.
Dan Loeb's Third Point LLC purchased a 8.2 percent stake in the company, while activist investor Carl Icahn revealed a near 13 percent stake in the multi-level marketer of nutritional and weight-loss products in February.
Between the iPhone and the Android ecosystem, Research in Motion's share of the smartphone market has been devastated. Given the realities that this company faces, it is little surprise that the stock is so heavily shorted. Over the last five years, shares have lost around 88 percent of their value and Research in Motion's market cap has dwindled to around $7 billion.
Currently, around 32 percent of the company's stock has been sold short as BlackBerry attempts to resurrect its business with its recent launch of BlackBerry 10.
Deckers Outdoor (NASDAQ: DECK ) This one time high-flier fell on hard times in 2012. Over the last year, the stock has dropped about 48 percent as revenue growth has slowed and profitability has been hurt by rising input costs. The company is the maker of UGG boots and Teva footwear.
Falling demand for UGGs, which account for the majority of Deckers' sales, have made this stock a favorite of short-sellers. Around 39% of the company's stock has been sold short as the stock continues to attract negative sentiment even after a large decline in 2012.
GameStop (NYSE: GME ) This stock has been a favorite of short-sellers who view the company's brick and mortar business as being increasingly cumbersome. The short thesis for GameStop is similar to that of companies such as Best Buy (NYSE: BBY ) and Barnes & Noble (NYSE: BKS ) who have been hurt badly by the rise of e-commerce.
Over the last five years, shares of GameStop have lost around 46 percent. Over the last year, however, the stock is up around nine percent. Nevertheless, traders have been consistently bearish on this name no matter what the near-term price action has been. In recent weeks, around 33 percent of the company's float had been sold short as investors believe there is more downside ahead.
J.C. Penney (NYSE: JCP ) - This company has been attempting to restructure its business under former Apple executive Ron Johnson. Among the initiatives launched by Johnson was a straight-forward pricing model that eschewed frequent sales in favor of everyday low prices.
The company, however, began rolling out sales once again in January as the new pricing scheme flopped with consumers. On February 27, the company is expected to report its fourth consecutive quarter of sales and profit declines. Bill Ackman's Pershing Square was the largest holder of the stock as of December 31, 2011 with a near 18 percent stake. Over the last year, the stock is down almost 50 percent and currently around 33 percent of the company's float has been sold short.
Tesla Motors (NASDAQ: TSLA ) It is not difficult to understand why investors would be bearish on Tesla's stock. The electric car manufacturer is an unproven company attempting to carve out a niche in a new and competitive market. Using standard metrics, this is an expensive stock.
For example, Tesla trades at a forward P/E above 24, a price/sales ratio over nine and a price/book ratio of 31 -- all measures significantly higher than its competitors. Despite the fact that Tesla is a heavily shorted name, the stock has performed well in recent years with shares rising almost 80 percent since their first trading day on July 9, 2010. Nevertheless, traders continue to bet against the name with around 37 percent of Tesla's shares currently sold short.
Strum, Ruger & Co. (NYSE: RGR ) The strategic landscape for Strum, Ruger & Co's business is extremely interesting. On the one hand, the company may face long-term headwinds if more onerous firearm laws and regulations are passed in the wake of shifting gun control sentiment in the United States.
The renewed debate over gun control, however, has set a fire under Strum, Ruger's business with record firearm and ammunition sales. This seems to be a near-term catalyst for the company, but investors remain concerned about the long-term ramifications of stricter regulations. The share price also faces headwinds irrespective of how the business is performing as large institutional investors have been dumping the stock due to the unfavorable publicity surrounding the company.
Many of these large investors may never invest in a gun company again. Although the future of Strum, Ruger is very much in flux, the stock has attracted a significant amount of negative sentiment with almost 37 percent of its shares sold short.
(c) 2013 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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