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Time to buy ‘shorted’ stocks Add to ...

It is not easy being a short-seller when the stock market is going nowhere but up. The S&P 500 has hit a succession of record highs recently, with just nine of the broad index’s 154 industry groups showing declines for the year.

Betting that a stock will decline in this sort of bullish environment is not easy to get right. Indeed, Bespoke Investment Group pointed out last week that the most-heavily shorted stocks within the S&P 1500 have been showing the biggest gains since April 15.

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This is not a product of bad luck: Shorted stocks could be seeing gains as short-sellers abandon their positions by buying back the shares they had previously sold.

Now, Bespoke has taken a look at individual names by listing the 25 stocks with the highest short interest as a percentage of their float – a common method for determining which stocks are being favoured by short-sellers, who profit when share prices fall. Some of these stocks have seen big gains since the end of April.

“Overall, the average performance of the stocks on the list is a gain of 6.75 per cent, which is nearly three times the gain of the overall S&P 1500 (2.33 per cent),” Bespoke said on its blog.

Just three of the 25 stocks are down for the month. And as they point out, their list doesn’t even include the likes of Tesla, which has surged 57 per cent this month with 40 per cent of its float sold short, but is not a member of the index.

The idea is that stocks with high short-interest could continue to rise and outperform the broader market as the bull market continues. On Tuesday afternoon, the S&P 500 was up nearly 15 points to 1649, for yet another record high. There has not been a correction of more than 5 per cent since November – and some observers are now even weighing the possibility of an upcoming “meltup” (the opposite of a meltdown).

At the top of Bespoke’s list of shorted stocks: Blyth Inc., Questcor Pharmaceuticals Inc., Coinstar Inc., Bio-Reference Laboratories Inc. and Spectrum Pharmaceuticals Inc. – with short-interest ratios of 40 per cent or more.

But the stocks on the list with the greatest performance since the end of April – in other words, shorted stocks that aren’t going as planned – the list is dominated by 3D Systems Corp. (up 23 per cent), Questcor (up 22 per cent), Barnes & Noble Inc. (up 19 per cent) and ITT Educational Services Inc. (up 15.5 per cent).

It isn’t easy betting on stocks that short-sellers have targeted as the most likely to fall (after all, they have their reasons). Clearly, though, it is a strategy that has been working out just fine for some intrepid investors.

Follow on Twitter: @dberman_ROB

 
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