3 Heavily Shorted High Cap Stocks

Includes: ESRX, GME, GRPN
by: Benjamin Goldman

As one of my finance professors said, "shorting a stock is a way to tell the world that this stock sucks". The fact that a stock is heavily shorted suggests that investors believe it is overpriced. However, shorting a stock just because everyone else is may not be a great idea. In this article, I analyze three stocks which are among the most shorted on the market.

Gamestop Corporation (NYSE:GME)
Gamestop's future is heavily debated as the company thrives now, but is looked at by many as the Barnes and Noble (NYSE:BKS) or Borders of the future as the video game industry will move more to downloads like books did. What's going well for Gamestop is that about half of its business is from used games, and with Best Buy's (NYSE:BBY) recent negative publicity from the holidays, more video game consumers will move to Gamestop.

Out of 136.42 million shares outstanding, 42.57 million shares were shorted as of January 13th. The stock has a short ratio of 15.30. I believe the company will exceed expectations in the short term, but its business model needs to make some major changes for it to stay a valuable company.

Express Scripts (NASDAQ:ESRX)
Express Scripts has a suprisingly high short ratio of 15.1. The prescription management company had a much publicized dispute with Walgreen Company (WAG) which has led to a lot of competing pharmacies boosting advertising to draw in Walgreen's lost customers. The heavy shorting stems from the fact that the pharmacy benefit management industry is incredibly competitive and investors fear that unions, companies, and organizations will leave Express Scripts for a company that does have a relationship with Walgreen. Analysts believe that Express Scripts will grow its earnings by over 20 percent in 2012, while also growing revenue. For those who are with the analysts, Express Scripts is a good buy, but there are still a lot of risks that make me think it's best to avoid the stock right now.

Groupon has somehow continued to hold its high value since its IPO. With no profits yet, uncertainties with merchant retention, and mounting competition, Groupon is believed by many to be an incredibly overvalued stock. With a short ratio of 10.3 so soon after its IPO, the investors have definitely spoken. As of January 13, 4.9 percent of Groupon's shares were shorted as a percentage of float. This is incredible considering that only about 5 percent of Groupon's shares were shorted in the IPO. I believe that now is the best time to short Groupon after it had a bull run this past week from the buzz about Facebook (NASDAQ:FB).

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