Using Short Interest
Short selling is used by investors and traders to express a bearish view of a security. Short sellers initiate short interest by borrowing shares from a security owner and promising them to repay the shares with interest by an agreed upon date. The short seller profits when the stock price declines during the investment period. As a result, short selling is one of the best sentiment indicators outside of the stock price itself. Rising short interest reflects pessimism, and falling short interest reflects optimism. In addition to the actual level of short interest, investors may also find short interest an interesting and a more short term sentiment indicator.
Stocks to Watch
According to Nasdaq.com, here is a list of some of the most viewed stocks for short interest information during the past few days:
- Dendreon Corp (DNDN) - The biotechnology company is a hedge fund favorite. The company trades at rich valuations based on trailing earnings, but performance is expected to improve dramatically in the coming years as they bring additional facilities online and gain the requisite approvals. While we think there is reason to be cautious, the company has many tailwinds working for it as they continue to increase production capacity for their prostate cancer drug, Provenge.
- LDK Solar Co (LDK) - The Chinese solar company is getting beaten down along with peers because of pricing fears and pessimism of US listed Chinese based companies across all sectors. The company recently announced a $110 million share buyback program, spurring a 4.85% jump in the stock price. After some initial optimism, the announcement may have raised more questions than it answered, and as a result, the stock has returned to pre-announcement levels despite a generally broad based rally. The company's stock trades at less than half of its 52 week high.
- Netflix Inc (NFLX) - The online video rental company is one of the hottest stocks in the market and the recent news of their expansion into Latin America lifted the stock price to new highs. The company has a trailing P/E of nearly 85 and a forward P/E of 45.27. The company's revenues grew more than 58% between 2008 and 2010. While there is reason to be excited about the expansion news, investors should be cautious considering the mild success of the expansion into Canada which should have been a much more natural new market for NFLX. But shorts have hounded this stock for years and they have thus far been wrong. The renewed interest in short interest is likely a result of the new 52 week high.
- Apple Inc (AAPL) - The company's short interest is not high relative to the average daily share volume, but the high interest in Apple's short interest levels may have been the result of the company's large nominal stock price as well as the fact that it is close to a 52 week low. In addition, because Apple is now a technology bellwether, it is very possible that investors were simply studying potential ways to sell major technology industry following a sharp rally in the stock market. The company has not had any major fundamental headlines over the last few days. Later this month, the company is expected to release an updated version of its operating system as well as a refreshed version of the Macbook Air laptop. The company's most notable risks include the health of CEO Steve Jobs, as well as their dependence on a small array of retail electronics, but still, for the company's profitability and growth, the company trades at very reasonable valuations once you strip out the excess cash on the balance sheet.
- Research in Motion Limited (RIMM) - The previous king of smart phones is facing pressure from retail and enterprise competition. The company's trailing earnings and growth continue to be stellar, but decreasing margins could be a sign of troubles ahead. RIMM has a miniscule trailing P/E of 4.60 and a forward P/E fo 5.34. In addition, the company sports an impressive PEG ratio of 0.91 and profit margins of 16%. We have been bullish of RIMM's stock because of the cheap stock valuation and the company's impressive technology and ingrained position in the enterprise market. We even listed the stock among 5 Stocks That Could Double in Price. But application developers are increasingly staying away from the Blackberry platform in favor of Apple iOS and Google Android platforms. This creates a negative cycle that will continue to harm RIMM, especially as it attempts to compete outside of enterprise.
- ZAGG Inc (ZAGG) - The company is one of the market's Apple Inc derivatives. While it creates various cases and personalized items for different brands, its sales are strongly dependent on Apple products like iPhones and iPads. After trading around $2 during much of 2010, the stock price soared to nearly $16 earlier this year. The company trades at a trailing P/E of 25 and a forward P/E of 15. Between 2008 and 2010, the company's revenues grew 285% to $76.14 million. Accounts receiveables and inventory are growing rapidly, but these concerns could evaporate with a strong holiday sales season. Trading volume has been extremely high in recent weeks. During the last 20 trading sessions, only 6 days were below the 3 month average daily volume.