If you’re afraid the market has outkicked its coverage and that we are set for a drop, then the best place to put your money might be in a trade that plays the downside.
And what better way to play the downside than to play the most hated stocks on Wall Street?
A recent number crunch shows that a number of cult stocks are ripe for a spill, if the short traders have anything to say about it. In fact, a host of stocks have 30%, 40%, even 50% of their available shares held by those betting against the companies!
I’m talking about short interest as a percentage of “float” — that is, what’s available practically to be traded on a given day when you back out restricted shares.
Get a load of some of these stocks that have more than a third of their float held short:
Tesla: Innovative electric car manufacturer Tesla (NASDAQ:TSLA) has outperformed year-to-date and is up 30% in the past six months. That’s despite a number of issues, including a complete lack of profitability, tiny sales and, more recently, a bad review about a lack of battery life and mileage in the Model S that resulted in a double-digit slide in February. However, TSLA short interest as a percentage of float, as of Feb. 15, was almost 57% — more than half of shares available for trading! So if negativity continues both on the balance sheet and in the public eye, TSLA could crash.
JCPenney: There’s a little bit of trouble in paradise for former Apple (NASDAQ:AAPL) retail guru Ron Johnson and his grand scheme to revitalize JCPenney (NYSE:JCP). Citi and Oppenheimer just cut their ratings as continued sales slides and management miscues not only mean a recovery isn’t happening but that the bleeding has gotten worse. JCPenney stock is down more than 60% in the past 12 months, but the bears see even more downside — JCP short interest as a percentage of float was a staggering 43% as of Feb. 15.
Deckers: Those cutesy UGG boots made by Deckers Outdoor (NASDAQ:DECK) were all the rage. I say “were” because even though the stock managed to quadruple from 2009 to 2011, it is down 40% in the past 12 months as momentum has dried up. Revenue and profits are still growing, but not as nicely as they once were — and in a momentum stock like DECK, that can be the beginning of the end. DECK short interest as a percentage of float was 41% as of Feb. 15.
Herbalife: In other cult stock news, Herbalife (NYSE:HLF) remains a playground for hedge fund heavies Bill Ackman and Carl Icahn, among others. Some label the stock a giant pyramid scheme. Others think Ackman’s short thesis is stupid. Who will win? Well, the short sellers are siding with Ackman right now … but before we claim a victor, keep in mind the cost basis is key. Herbalife is off 40% from last spring but has almost doubled since its January lows. HLF short interest as a percentage of float, as of Feb. 15, was 34%.
ITT: There is no industry that is perhaps under more systemic pressures than for-profit education, and thus ITT Educational Services (NYSE:ESI). Concerns over high costs, poor graduation rates and a lack of quality courses have brought down the wrath of legislators and regulators. The latest: Senate Democrats want even more oversight over the already-battered industry. Not good for ESI, or for any players in the space, including University of Phoenix operator Apollo Group (NASDAQ:APOL) or Strayer Education (NASDAQ:STRA), among others. ITT short interest as a percentage of float was last measured at 25%.
I want to point out again that this data was from Feb. 15, which is the latest available via Yahoo! Finance and other sources. Still, it’s worth noting even if it’s a little old.
And these numbers are just the beginning of the hit list. Other stocks with a short interest more than 20% of their float include data and cloud play Fusion-io (NYSE:FIO), video game retail stock GameStop (NYSE:GME), grocer Safeway (NYSE:SWY) and print shop and marketing firm Pitney Bowes (NYSE:PBI). The lack of margins and/or profits for all of these also make the big short interest logical.
Remember this if you’re looking to play the downside of the market, because short interest is high and these small-time stocks have limited market cap and reach, which equals bigger volatility. That could mean bigger profits should the short traders prove correct.
But a brief disclaimer: There are a host of ways to parse market data, and the most important part of being an investors is carving out a philosophy that works for you and your unique situation. Your analytic strengths, the amount of time you have, the capital at your disposal and even your age all inform what makes a “good” trade, and there are no universal tools or strategies. More succinctly, shorting stocks is not something that all investors should be doing.
So keep this in mind, remember there is no such thing as a sure thing, and watch out for the short squeeze.
- On Tesla: The CEO says that bad review cost it $100 million. Ouch. (U.S. News)
- On JCP: James Brumley wonders when Ackman will lose his patience with the boy wonder Ron Johnson, who has obliterated the stock price since he took over. (InvestorPlace)
- On Deckers: On one hand, S&P just upped its target to $47. On the other, that $47 mark is below current pricing. (Jags Report)
- On Herbalife: Speaking of Ackman, here’s a great read from William D. Cohan about “The Big Short War” in this nutrition stock. (Vanity Fair)
- On for-profit ed stocks: Robert Ciura says that shares are cheap, but the sector is facing big headwinds so don’t bargain hunt. (The Motley Fool)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.