Short sellers are among the smartest investors in the market. Paying attention to their activity in a stock you have an interest in can give you clues to future price activity.
If short sellers as a group have sold short three to five percent of a company’s float, it is a warning sign that there might be a reason to be concerned. Since I give power to the knowledge of short sellers, I assume that they are aware of something that I am not aware of. If the short position is greater than 5% i,t is a big warning sign that something could be wrong at the company. The reasons for being short could extend beyond the individual company. It is possible that the asset group (small cap, tech stocks and growth stocks as three examples of asset groups) could be falling out of favor or in a negative technical position.
More important than the percent of shares sold short, however, is the trend of the short position. Is it expanding or contracting? This tells you what the short sellers are thinking through their actions. If their short position is expanding then short sellers are growing more negative on the share price. If the short position is contracting then the short sellers are saying to you that they think the down side risk is limited.
Harris and Harris (TINY) is a great example in the current market environment. It is a small cap company in technology and growth. All three descriptions have been out of favor with the market from 2004 until this summer. Now companies with this description are coming back into favor and, in fact, are descriptive terms of the hottest sectors in the market.
Harris and Harris has equity positions is about 28 private nano technology companies. With the hot IPO market heating up you can expect Harris & Harris to see its private companies come public. As an example of how hot the Initial Public Offering [IPO] market has gotten, one just needs to look at the IPO of Constant Contact (CTCT). On 10/03/2007, Constant Contact came public at $16.00 – higher than the $12.00 to $14.00 expectation and traded up $11.64 in its first day of trading. This suggests that as the private companies in theHarris & Harris Group portfolio come public, attention will be drawn to Harris & Harris shares.
So what’s going on with the short sellers in Harris & Harris? The level of open short positions is still high at 6.7% of the shares floating. The trend, however, is what is more important. TINY’s share price is close to the lower end of a multi-year trading range and the short position is steadily decreasing. This tells me the short sellers see limited downside in the shares of Harris & Harris and are buying too close their short positions.
To spot check the percent of float sold short on a company go to the Key Statistics page here.
To check the trend of monthly reported short selling, go here and click the short interest in the drop down box under info quotes.
We suggest that Harris & Harris is an attractive buy at it present price.
Disclosure: An account related to LOTM has a position in the shares of Harris & Harris Group.