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According to an article in the Wall Street Journal's MoneyBeat, hedge funds are having an extremely hard time this year. The article cites a report by Goldman Sachs (NYSE:GS) that shows that 50 companies "heavily" shorted by hedge funds have not only outpaced the S&P 500 this year, but they have produced average gains of 30%. Here is that list which begins with the most shorted stocks as a percent of market cap:

CompanyTickerMarket Cap (in Millions)# of Hedge Funds Owning StockTotal Return YTDShort Interest as % of Market Cap
Outerwall Inc.OUTR1,7733322%38%
Cliffs Natural Resources Inc.CLF3,63729-37%36%
BlackBerry LimitedBBRY5,74238-8%35%
NII Holdings, Inc. Class BNIHD1,09725-11%34%
WhiteWave Foods Co. Class AWWAV2,0152623%33%
United States Steel CorporationX2,73328-20%32%
Sarepta Therapeutics, Inc.SRPT1,0742424%31%
Herbalife Ltd.HLF6,72342102%31%
CARBO Ceramics Inc.CRR1,9901611%31%
Sodastream International LtdSODA1,3171542%31%
Liquidity Services, Inc.LQDT1,03412-20%30%
Francesca's Holdings CorporationFRAN1,04518-8%30%
VIVUS, Inc.VVUS1,26234-7%29%
Fusion-io, Inc.FIO1,06227-53%29%
Pitney Bowes Inc.PBI3,5202872%29%
Arena Pharmaceuticals, Inc.ARNA1,54710-21%28%
Radian Group Inc.RDN2,24839113%27%
Heartland Payment Systems, Inc.HPY1,4101430%27%
3D Systems CorporationDDD4,7012630%27%
World Acceptance CorporationWRLD1,0061415%27%
PHH CorporationPHH1,25734-3%26%
Deckers Outdoor CorporationDECK1,9423440%26%
Western Refining, Inc.WNR2,4953612%26%
Molycorp, Inc.MCP1,18620-33%26%
Polypore International, Inc.PPO1,90015-9%25%
Questcor Pharmaceuticals, Inc.QCOR3,99429153%25%
DreamWorks Animation SKG, Inc. ClassADWA2,1311770%25%
GameStop Corp. Class AGME5,6103394%25%
j2 Global, Inc.JCOM2,3541369%24%
Equinix, Inc.EQIX8,19872-20%24%
Frontier Communications CorporationClasFTR4,6792515%24%
US Airways Group, Inc.LCC3,0196416%24%
Interoil CorporationIOC3,6172533%24%
Vistaprint NVVPRT1,7491062%23%
athenahealth, Inc.ATHN4,0151549%23%
U.S. Silica Holdings, Inc.SLCA1,2212838%22%
IMAX CorporationIMAX1,7971819%22%
American Equity Investment Life HoldingCAEL1,2472058%22%
R.R. Donnelley & Sons CompanyRRD3,24326112%22%
Universal Display CorporationOLED1,6711341%22%
Air Methods CorporationAIRM1,5891711%22%

The 708 hedge funds that were included in the study had $1.5 trillion invested, with $1 trillion long and $500 billion short:

A typical hedge fund has risen 4%, on average, this year through Aug. 9, according to an analysis conducted by Goldman Sachs. That performance compares to a 20% total return (including dividends) for the S&P 500 over the same time frame, meaning the market has outperformed an average hedge fund by five times this year.

This is the reason that a lot of the "Big Money" people and/or funds do not short. If a company is heavily shorted, any good news can bring on a short squeeze as the price goes up and short investors are forced to cover. This then makes the price go even higher due to so many short investors competing for limited shares with the long investors that are buying on the good news. And when a stock has a large fund ownership, experienced professional traders intentionally buy to force the stock higher yet.

Redbox Movie Machines

Consider Outerwall (NASDAQ:OUTR), which is the first stock on the list (above) that the hedge funds most heavily shorted. The company owns the "Redbox" movie rental machines that have become so popular due to the sheer convenience and cost. They are on almost every corner with over 43,000 self-service kiosks. Originally Coinstar, it also operates change machines. It has a Price to Earnings of 14.71 and a forward P/E of 10.82. The company's chart shows that the stock has been going straight up for the last year. Of course there are some dips, but the trend line is up over 22% for the year:

Chart forOuterwall Inc.

The earnings for 2013 are projected to be up over $1 a share, with a huge jump during the December quarter:

Earnings EstCurrent Qtr.
Sep 13
Next Qtr.
Dec 13
Current Year
Dec 13
Next Year
Dec 14
Avg. Estimate1.441.605.905.84
No. of Analysts10.0010.007.0010.00
Low Estimate1.200.945.314.60
High Estimate1.591.916.266.52
Year Ago EPS1.260.934.835.90
Revenue EstCurrent Qtr.
Sep 13
Next Qtr.
Dec 13
Current Year
Dec 13
Next Year
Dec 14
Avg. Estimate609.26M645.96M2.38B2.55B
No. of Analysts10101010
Low Estimate581.40M583.80M2.30B2.34B
High Estimate631.00M715.10M2.48B2.72B
Year Ago Sales537.56M564.08M2.20B2.38B
Sales Growth (year/est)13.30%14.50%8.30%7.10%

And Outerwall's revenue is also expected to be up. With the flat earnings projected for 2014, I could see a hold call after the 2013 numbers are added to the share price, but to short it? Sorry, I don't see it. And yet the short investors are still actively shorting the company. With nine days to cover, watch for a short squeeze right before the options close near the middle of next month.

Short Interest for Outerwall:

Settlement DateShort InterestAvg Daily Share VolumeDays To Cover
7/31/20139,526,957960,6489.917219
7/15/201311,217,294548,65320.445152
6/28/201310,657,936529,22020.138952
6/14/201311,006,888478,19723.017476
5/31/201310,679,803808,23813.213686
5/15/201312,242,478683,67517.906868
4/30/201312,460,7831,130,45811.022774
4/15/201312,970,486474,41027.340246
3/28/201313,212,770483,25927.340970
3/15/201314,043,976957,98314.659943
2/28/201314,219,5061,123,26712.659061
2/15/201314,255,5841,653,6898.620475
1/31/201313,566,4971,110,64312.214993
1/15/201312,901,8871,098,30111.747132
12/31/201212,971,530616,89121.027264
12/14/201211,708,8561,018,86811.492024
11/30/201211,702,366818,53514.296720
11/15/201211,275,150787,83514.311563
10/31/201210,628,7481,989,7825.341665
10/15/20129,356,287771,51412.127177
9/28/201210,380,1941,651,5896.284974
9/14/20129,076,824856,30710.599965
8/31/20129,081,4011,359,2986.680949
8/15/20129,484,8731,336,4007.097331

According to the last form 13-F which is filed with the Securities and Exchange Commission each quarter, Outerwall has a large institutional following. There are 297 Institutional Holders that own 31,501,311 shares. Interestingly the largest owner is Goldman Sachs, which sold 23% of its Outerwall shares during Q2:

Owner NameDateShares HeldChg SharesChg%Value 1,000s
GOLDMAN SACHS GROUP INC06/302,053,723(623,555)(23.29)128,070
VANGUARD GROUP INC06/301,963,672(174,461)(8.16)122,455
IRIDIAN ASSET MANAGEMENT LLC/CT06/301,950,610450,42330.02121,640
FINE CAPITAL PARTNERS, L.P.06/301,394,025178,14814.6586,931
BLACKROCK FUND ADVISORS06/301,349,9316,629.4984,182
FISHER ASSET MANAGEMENT, LLC06/301,248,814207,80619.9677,876
CIBELLI MARIO06/301,080,00056,3005.5067,349
PARK WEST ASSET MANAGEMENT LLC06/30984,958(220,882)(18.32)61,422
BARCLAYS GLOBAL INVESTORS UK HOLDINGS LTD06/30834,974(163,085)(16.34)52,069
WASATCH ADVISORS INC06/30704,59832,0244.7643,939
STATE STREET CORP06/30650,397(11,821)(1.79)40,559
RENAISSANCE TECHNOLOGIES LLC06/30622,600(133,100)(17.61)38,825
WEITZ INVESTMENT MANAGEMENT, INC.06/30602,229(83,700)(12.2)37,555
AMERIPRISE FINANCIAL INC06/30598,96712,0372.0537,352
THOMPSON SIEGEL & WALMSLEY LLC06/30594,469(60,172)(9.19)37,071

The 50-day EMA crossed the 200-day EMA in March of this year to form a golden cross. And that pattern has held with no indication of dipping back down. This is very bullish:

Chart forOuterwall Inc.

Everyone has their reasons for investing the way that they do. Sometimes I think that short investors see a chart that is heading up and think that eventually it will come back down. And this one did drop down to the 200-day EMA recently, but it popped right back up again. Right now the price is sitting comfortably above the 50-day EMA. While many stocks could be heading for an inevitable correction this Fall due to macro events, Outerwall might hold. Why? Because it is an exceptionally cheap form of entertainment, and it will excel when consumers budgets are tight. Obviously, the shorts that are still holding their positions are not going to quit now. This should be good news for all of the Outerwall longs, because the current high target on the stock is $100. However, the shorts are looking at the low target of $30. It will be interesting to see how that works out for them.

Source: Goldman Sachs Study Names Outerwall The Most Shorted Stock