While short interest for the major indices is near multi-year lows, there are still plenty of stocks where the shorts have kept their negative bets in place. In the table below, we highlight the 25 stocks in the S&P 1500 with the highest short interest as a percentage of float. As shown, each of these companies have at least 20% of their freely floated shares sold short.
Generally speaking, high levels of short interest are considered negative for stocks. However, in multiple studies we have done over the years, we have found that during periods when the market is rising, heavily shorted stocks tend to outperform. This year for example, the 150 stocks in the S&P 1500 with the highest short interest as a percentage of float at the start of the year are up an average of 26.7%. At the same time, the 150 stocks with the lowest short interest are up an average of 17.8%, representing a difference of nearly 900 basis points. In the S&P 500, we saw a similar trend. The 50 stocks with the lowest short interest at the start of the year are up just 12.2%, while the 50 stocks with the highest short interest at the start of the year are up more than twice that (27.6%)!
The bottom line comes down to this, if you think the market will trade higher in 2010, stocks with high levels of short interest will collectively outperform. On the other hand, if you expect equities to pull back in 2011, stick with the stocks where short interest is low.
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