5 Stocks Hounded by Short Sellers

by: NakedValue

According to nasdaq.com, these are June 13, 2011's top five most viewed names based on short interest. While interest among the short selling community is very high in these names, this is not a recent phenomena. Each stock has seen a strong trend of increased short interest this year. Investors should take a closer look and decide for themselves whether the short interest is a warning sign of corporate problems or an opportunity for advantageous stock purchases.

1. Sirius XM Radio (NASDAQ:SIRI)

Settlement Date Short Interest
5/13/2011 317,089,214
12/31/2010 213,077,965

The satellite radio company operates around 135 channels for more than 20 million subscribers. After peaking at $2.44 on May 31, the stock has traded as low as $1.86. Fundamentally speaking, there is nothing stock specific driving the recent decline. The stock does often suffer from weakness following the earnings cycle. In addition, the broad market has come under pressure of late. As such, high stock market beta names suffer disproportionately during draw downs.

The recent price weakness took the stock below an important $2 threshold. While investors should focus on per share price/value ratios rather than nominal stock price, there are structural issues in play. As we mentioned in article about SIRI's possible inclusion in the S&P 500 Index, price and liquidity are important factors in determining a stock's eligibility in the index. In that sense, this price dip is a bad thing. But much more important is the fact that institutional investors have explicit limitations on stocks in their investable universe. One of the factors is stock price. While the actual price bands are institution specific, $10, $5 and $2 are the most common hurdles. With the stock falling below the $2 mark, institutions may now be less interested in the stock even once the stock drifts back above $2.

The fundamental story remains in tact and bullish investors should buy additional shares on weakness. We buy into many of the bullish factors and as such, we speculated that SIRI's stock price could double.

The bigger story isn't so much the rising short interest, but rather the rising competitive pressures from market participants like Pandora Media (NYSE:P) as well as changing demand trends for automobiles domestically and abroad. Pandora is an internet radio company with more than 90 million registered users. Its IPO is expected this week and because of investor excitement, the underwriters revised the pricing higher.

2. E-Commerce China Dangdang (NYSE:DANG)

Settlement Date Short Interest
5/13/2011 5,913,136
12/31/2010 3,119,471

Billed by some as "The Amazon.com of China," the stock price has dropped to around $10 after soaring to nearly $35 in early 2011, shortly after the company's IPO. The company has fallen under the same price pressures as many other Chinese stocks trading in the US.

3. Youku.com Inc (NYSE:YOKU)

Settlement Date Short Interest
5/13/2011 9,036,902
12/31/2010 2,839,075

The Chinese internet portal company is often called "The YouTube of China" and considering the swarms of smart money investors that have piled into the stock since the recent IPO, many are buying into the investment thesis. With 231 million unique visitors in March 2011, the company is already an established asset, but it also has massive upside potential in the Asian market.

Still, short sellers see a different side of the Youku.com story. They see the 80.99 price/sales ratio and 2010 net loss of $31 million. Despite exceptionally strong revenue growth of 163% in the first quarter, this was a sharp drop from the 365% growth in 2009.

4. Dot Hill Systems Corp (NASDAQ:HILL)

Settlement Date Short Interest
5/13/2011 497,900
12/31/2010 133,912

The Colorado-based company specializes in low and midrange storage solutions and server software. After rising to nearly $4 per share in February 2011, the stock has tumbled to below $3. Revenue for the quarter ending March 31, 2011, actually jumped almost 22% from the year ago quarter but the net loss increased dramatically because of reduced gross margins and a rise in general and administrative costs.

The company could be subject to company specific weakness and also a more generalized market move away from some of the higher valuation technology, data storage names. While exiting its low margin operations with NetApp could improve operations, it significantly exposes the company to concentration risk. In March 31, 2011, the company now derives 76% of revenue from Hewlett-Packard (NYSE:HPQ).

Notable shareholders include: Renaissance Technologies, Highlander Capital, Perkins Capital Management and Goldman Capital.

5. Citigroup Inc (NYSE:C)

Settlement Date Short Interest
5/13/2011 42,001,638
12/31/2010 35,463,084

The global banking powerhouse's appearance on this list is one of the most telegraphed occurrences in the stock market. In its desperation to change the market's perception of the company and unlock shareholder value, Citigroup executives decided to enact a 10-1 reverse stock split. They hoped that a higher stock price would eliminate the structural limitations that prevented some institutions from even looking at the money center bank's stock. While management likely succeeded to some degree, the price change also improved short selling availability.

Still, we view this recent stock price pressure as largely an industry wide phenomena. In addition, while the short selling interest has had a negative effect on the stock, it has not changed the fundamental story. The bank is still one of the largest and most vital in the world and at a price/book value of 0.67, the stock is likely cheap even if future regulations drive return on assets lower.

Short selling has such a negative connotation in general investing circles, but it is actually an important function in a healthy market. Short sellers sell stock that they do not own. They borrow this stock with an agreement to repay the shares at a later period. In the meantime, the short sellers hope for a decline in the stock price so that they can purchase back the shares intended for repayment at a lower value.

Rising short interest has a negative short term effect on the stock price. But longer term, the effect can turn positive because short sellers are ultimately a collection of guaranteed future buyers of that stock. Investors should remember that short selling generally can not affect the fundamental story at strong companies, but can adversely affect weak or leveraged companies with deteriorating operations. This is true because leveraged companies may be more dependent on occasional capital raises.

Disclosure: I own C shares

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