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There is always a reason why a stock has a high short interest. Short sellers look for signs of weakness in a company, such as a negative earnings report, loss of market share and so on. There are other basic criteria for selecting a stock to short, such as liquidity, outstanding short position, etc. For instance, a stock that has a short ratio of 15-20% would indicate that the word is out and the bad news is already incorporated in the stock's price. In addition, not every stock can be shorted. Some stocks are hard to short because their shares are not easily available to borrow, which could happen for a variety of reasons. One generally cannot short a stock within a specified period from its IPO, depending on the exchange the stock trades on.

Real estate investment trusts (REITs) can also become targeted by short sellers under the right circumstances. Here are five of the most shorted REITs in the market, based on number of shares held short as a percentage of total shares outstanding:

REIT NAME Ticker # Shares Held Short Short Ratio
1. iStar Financial Inc. SFI 20.5 mil. 22.2%
2. Dupont Fabros Inc. DFT 11.4 mil. 18.2%
3. National Retail Properties, Inc. NNN 13.1 mil. 15.2%
4. Digital Realty Trust, Inc. DLR 14.6 mil. 14.7%
5. CYS Investments, Inc. CYS 8.9 mil. 10.8%

As a reminder, short interest may be useful in judging investor sentiment for a particular stock from month to month, and as a comparison with other shorted stocks. This indicator is useful for both bears and bulls - bulls may consider a high short interest ratio a positive, since eventually there would be upward pressure on the stock's price as short sellers cover their short positions. This upward pressure can become very strong if, for instance, a company announces some positive news and forces a number of short sellers to cover at the same time.

iStar Financial Inc. (SFI) is a REIT focused on lending on and leasing of commercial real estate. As such, this is a hybrid between a mortgage and a real estate REIT. The reason why this company is at the top of the list is clear - it is not profitable. It just announced its 3rd Quarter 2011 results, reporting another loss of $62.2 million or $0.71 per share. The consesus earnings estimate was a loss of $0.58 per share. It's even worse that iStar has not paid dividends since 2008.

SFI has added almost half a million shares to its short tally in the past two weeks.

Dupont Fabros (NYSE:DFT) is a REIT involved in owning, operating and managing wholesale data centers. The company's data centers are highly specialized facilities used primarily by national and international internet companies (including Yahoo and Facebook) to house, power and cool the computer servers that support their normal operations. This REIT is profitable, but it has a rather low rate of return and low enterprise value. Its dividend yield is only 2.3%.

DFT's number of shares held short dropped by an impressive 1.4 million in the past two weeks.

National Retail Properties (NYSE:NNN) acquires, owns, invests in and develops properties that are leased primarily to retail tenants under long-term net leases and primarily held for investment. The current yield is 5.8% and the stock price is approaching its 52-week high. NNN is pretty diverse in terms of types of retail space and geographic location. Its asset base consists of 1,246 properties in 46 states. The key for this REIT is the quality of its tenants National Retail's major tenants include Pantry, AMC Theater, Pep Boys, Barnes and Noble, and Best Buy. Overall, this stock is starting to gain momentum and I would expect to see its short ratio continue to dwindle - over 800,000 shares were bought to cover in the last two weeks.

Digital Realty Trust (NYSE:DLR) is very similar to Dupont Fabros in its line of business. The stock has a yield of 4.4% and it is trading slightly below its 52-week high of $65.01. The company just announced its quarterly earnings, reporting EPS of $1.02, $0.02 better than the consensus estimate. Revenue for the quarter came in at $273.5 million versus the consensus estimate of $267.29 million. Another important recent development is the announcement of a new turn-key lease agreement with IBM in Singapore.

Surprisingly, Digital Realty has registered approx. 1 million shares increase in shares held short over the past 6 weeks. This has brought its short ratio up to 14.7%.

CYS Investments, Inc. (NYSE:CYS) is a mortgage REIT, which invests on a leveraged basis in Agency residential mortgage-backed securities (NASDAQ:RMBS). Its investments are collateralized by fixed rate single-family residential mortgage loans (typically 15, 20 or 30 years), adjustable-rate mortgage loans (ARMs),and hybrid ARMs. CYS currently yields 17.2%, which is among the highest in the mREIT industry. It is trading very close to its book value of $12.98 per share. Its short ratio of 10.8% has not seen much fluctuation in the past month.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 5 REITs With Significant Short Interest