A stock’s short interest is the percentage of outstanding shares that are sold short, and essentially serves as a sentiment indicator. A high short interest means that many traders are placing bearish bets against the stock, while a low short interest indicates that investor sentiment is either bullish or neutral.
Additionally, a high short interest is frequently a predictor for volatility. When bad news emerges from the company, short sellers ferociously pound the stock lower. However, when good news is released, many short sellers are forced to sell their short position, which results in a short squeeze and a considerably higher share price.
Thus, stocks with high short interest are susceptible to dramatic up and down swings. Here are five notable stocks that are especially vulnerable to this kind of trading action.
Short Interest: 38.40 percent
SodaStream is the world leader home-carbonation products. Its popular devices allow consumers to carbonate and flavor their own soda, allowing users to save hundreds of soda cans per year, while enjoying tasty soda at a reasonable price.
The enormous short interest in SodaStream is a bit of a head scratcher. The company only commands a $1.46 billion market cap, trades at a 1.09 PEG ratio, and was recently the subject of takeover rumors from PepsiCo. SodaStream’s growth products are also fairly exciting, as the company has hinted at moving into the restaurant business via industrial-sized tap water carbonators. With a product that consumers love and solid growth potential, short sellers could be in trouble with a buyout or replication of May’s stellar earnings beat.
Short Interest: 35.80 percent
Following the rise of e-commerce and the demise of electronics retailers like RadioShack and Circuit City, video game retailer GameStop logically appeared next in line to undergo a secular collapse. This thesis, however, has been proven wrong over the last couple months, and short sellers have paid the price.
GameStop’s survival is the result of gaming policies from Microsoft (MSFT) and Sony (SNE), who announced this month that their respective consoles would not restrict the transfer of used games. This policy effectively keeps GameStop’s used games business in tact for at least the next several years. As a result, many shorts have been squeezed, sending the stock up almost 140 percent over the last year.
A huge short position, however, remains on the stock. GameStop now commands a lofty $5 billion market cap and is still in the consumer electronics retail business, a space that has been in secular decline for years.
Short Interest: 31.90 percent
With a multi-billion dollar market cap and huge quarterly losses, Tesla, a producer of electronic cars, was widely deemed “overvalued” in the months after it went public in 2010. It attracted a horde of short sellers, who insisted that the company was a “cult,” and did nothing to warrant its supposedly ridiculous valuation.
However, short sellers have been dead wrong about Tesla. The company posted a surprise profit in Q1 2013 and the Model S is being sold faster than it can be produced. The company also has a brilliant leader in Elon Musk and has other vehicles in the pipeline. Consequently, short sellers have been burned in recent months, as Tesla is up 245 percent in the last six months and over 500 percent since it went public.
With all this said, many investors are still shorting Tesla. Over 30 percent of outstanding shares are short because many investors now perceive Tesla’s $12.4 billion market cap as even more ridiculous than its pre-IPO valuation. With so many traders short the stock, Tesla could be ripe for another squeeze if the company releases another game-changing model or delivers another blowout earnings report.
Research in Motion (BBRY)
Short Interest: 33 percent
Investor sentiment has never been more bearish towards Research in Motion, whose BlackBerry phones have become almost irrelevant in the smartphone market. With a minuscule market share compared to Apple (AAPL) and Android, Research in Motion shares are down over 90 percent in the last five years and 27 percent in the last month.
While the bulls can now make a value-oriented case for buying Research in Motion stock (it now sells for less than one-half 2012 sales, has a market cap of only $5.3 billion, and could be a takeover target), short sellers believe that the death of the BlackBerry is still unfolding. As a result, the company still has one of the highest short interests in the NASDAQ, as investors are starting to doubt whether BlackBerry has an effective turnaround strategy in place.
Short Interest: 39.50 percent
Once a popular destination for consumer electronics purchases, RadioShack’s business has been obliterated with the emergence Amazon, Apple stores, and other alternatives to purchasing gadgets and smartphones. Consequently, short sellers have pounded the stock since 2010 when it traded at over $23. Shares now sell for just $3.19.
The company has fallen from grace because it provides little value to customers, who are flocking to purchase gadgets from online and directly from producers. Unless RadioShack can reinvigorate its brand, the company will be gone several years from now.