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3 Stocks That Are Too Dangerous to Short

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Sometimes even companies that are in secular decline or ones that seem destined for bankruptcy can take the market by surprise. All of these stocks are struggling, making them seem like good short interest candidates. When expectations are in the basement, however, one fluky positive data point or buyout rumor can send shares soaring.

3 Stocks That Are Too Dangerous to Short

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Often, these surprise jumps are compounded by blindsided short sellers that are forced to close out their positions. The result can be epic short squeezes like the one in November that sent DryShips Inc. (NYSE: DRYS ) stock from under $4 to above $100 and then back below $5 in a matter of days.

DRYS had a massive amount of short interest. For quite some time, the company has seemed destined for bankruptcy. A spike in the Baltic Dry Index , however, was enough to ignite an epic rally that torched short sellers.

Here's a look at three other stocks that are just too dangerous to short.

Don't Short These Stocks: Fitbit (FIT)

Should You Buy Fitbit Inc (FIT) Stock in 2017?
Via Fitbit

There are plenty of reasons to suspect Fitbit Inc (NYSE: FIT ) won't survive on its own in the long-term. Revenue growth has steadily declined, falling 14.1% in the last quarter. Earnings growth, too, has been negative, falling 42% year-over-year.

From a practical standpoint, FIT is the David to Apple Inc.'s (NASDAQ: AAPL ) Goliath. Fitbit's devices are a one-trick pony compared to the Apple Watch. The Apple Watch has a huge ecosystem built around it. And even the Apple Watch has struggled to gain traction in the market. The idea that FIT can compete with Apple and its resources and market presence is a bit of a stretch.

Fitbit may not be able to compete with Apple, but Nike Inc (NYSE: NKE ) or Under Armour Inc (NYSE: UAA ) could be potential suitors under the right circumstances. Rumors have already circulated this year . Potential short sellers should remember that it doesn't take an actual deal to send a stock soaring 50% or 100%. Just look at where Twitter Inc (NYSE: TWTR ) shares have been on buyout rumors alone.

Fitbit stock currently has the dangerous combo of an incredibly high 31.6% short percent of float and rock-bottom market expectations. At this point, FIT stock is simply too dangerous to short.

Don't Short These Stocks: Office Depot (ODP)

Don't Short These Stocks: Office Depot (ODP)
Mike Mozart via Flickr

Office Depot Inc (NASDAQ: ODP ) may not have the short-squeeze potential that other stocks do, but it remains a dangerous short nonetheless.

ODP seems like a company that is in secular decline due to increasing online competition from Amazon.com, Inc. (NASDAQ: AMZN ) and others. Now that the ODP merger with Staples, Inc. (NASDAQ: SPLS ) has fallen through, both companies seem dead in the water. They may ultimately be destined to go the way of Circuit City .

It may be tempting to open a massive short position in ODP stock. However, it's important to remember that the company generated more than $300 million in profits in the past four quarters. Sure, those numbers may be at risk in the long term, but ODP is still generating plenty of income to be taken private.

That's what happened earlier this year when Apollo Global Management LLC (NYSE: APO ) crushed Outerwall shorts by taking the company private. Outerwall shares soared 11% on the news. Short sellers identified that Redbox DVD vending machines may be as obsolete in 10 years as brick-and-mortar office supply stores. But while these stocks have a hard time attracting investors in the public market, they are still profitable companies for the time being. ODP short sellers should consider the possibility that the company could be taken private at some point down the line.

Don't Short These Stocks: Sears (SHLD)

Don't Short These Stocks: Sears (SHLD)
Mike Mozart via Flickr

On the surface, Sears Holdings Corp (NASDAQ: SHLD ) appears to be on its last leg. SHLD has clearly not been able to adapt to the new digital age of retail. At this point, a large-scale turnaround seems very unlikely.

Before shorting SHLD shock like there's no tomorrow, however, traders should consider the risk of the trade. SHLD stock currently has a mind-boggling 70.6% short of float . That means that 15.3 million of the stock's 21.7 million shares available for trading are currently held short with 32 days to cover.

Short selling SHLD these days would be a lot like smoking a cigarette in a TNT factory. With that much short interest, all it would take to trigger a DRYS-esque short squeeze might be one single quarter of above-consensus earnings or an outlier uptick in revenue.

If there is even a whiff of a possible buyout, short sellers could also be caught with their pants down.

SHLD got rid of many of its most valuable real estate assets, but it still owns enough properties for buyers to be interested at the right price. At this point, given the explosive short-squeeze potential the stock has, SHLD short selling is simply not worth the risk.

As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.

The post 3 Stocks That Are Too Dangerous to Short appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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