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By Matt Doiron

All good things must come to an end, including large excess returns from a stock in the market. The challenge is identifying a point at which the stock will flatten out, or even decline. It can be difficult to sell a stock that has delivered enormous profits for an investor, and a nonparticipating investor considering a short position can be leery of standing in the way of a juggernaut.

One way to tell when a stock's rise may be about to slow, stop, or reverse is to study the aggregate size of short positions. As a stock's momentum carries it well above its fundamental value, value investors often take notice. By short selling, they take a position that will be profitable if the stock falls, and unprofitable if it continues to rise.

Therefore, retail investors can watch the activity of short sellers and consider their participation in a high-flying stock at least as a warning that other market players think it has become overpriced. Perhaps this is a signal to take profits on the investment, or for investors who can do so to initiate a small short position themselves. Using data from Fidelity, here are 15 large cap stocks that have risen at least 50% so far in 2012 and have had at least 10% short positions as a percentage of shares outstanding according to the most recent data:


Short as % of Shares Outstanding

Price Performance YTD







Cirrus Logic (NASDAQ:CRUS)



3D Systems (NYSE:DDD)









Western Refining (NYSE:WNR)






Under Armour (NYSE:UA)



athenahealth (NASDAQ:ATHN)



Terex (NYSE:TEX)



Interoil (NYSE:IOC)



Amerigroup (AGP)



Lincare Holdings (NASDAQ:LNCR)



Lennar (NYSE:LEN)



AOL is fading as a subscription Internet portal, but is trying to rebuild its business as a portfolio of content sites, including the Huffington Post network. Its stock has more than doubled this year as it makes limited progress in this area, and as it managed to successfully sell and lease a number of its patents to Microsoft. Short sellers, however, seem to think that the stock has risen far more than the fundamentals of AOL's business demand -- and it is expected by analysts to earn only $1.22 per share in 2013. With the current stock price above $34 and cash per share of under $16, the implied forward multiple is higher than Yahoo's or Google's before those companies' cash hauls are taken into account (read a detailed discussion of AOL).

Vivus' stock has more than doubled this year because the company may have its hands on a wonder drug: a drug that causes weight loss of up to 10% of body weight in the highest tested doses. The issue with Vivus is that its drug carries a number of safety concerns (including a higher risk of birth defects), leading some investors to conclude that a competing drug produced by Arena Pharmaceuticals -- or possibly other treatments still in development -- will win out in a litigation-fearing medical market (read more about the debate between Arena and Vivus).

Athenahealth has one of the biggest divergences between past performance and short activity -- the stock has nearly doubled this year, but the market is crowded with short sellers. What's the ruckus at this medical billing company? Probably that it suffered a 20% decline in earnings in its most recent quarter compared to the same period in the previous year, yet trades at 70 times forward earnings expectations and a five-year PEG ratio of 3.8. The insider selling at athenahealth this year -- much of which is the cashing in of stock options, but some of which is not -- is also not a good sign.

Finally, another stock whose momentum is being questioned by short sellers is Terex, a maker of capital goods such as lifts, cranes, and construction equipment. Highly exposed to the broader market with a beta of 3.4, Terex is expected to grow its business if sell-side research is any indication. Its forward P/E is 8. Large investor Pennant Capital Management bought more shares of Terex in late July, but a number of other traders are risking their capital on the stock falling.

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