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How To Collect Your Share of My Million Dollar Giveaway

How To Collect Your Share of My Million Dollar GiveawayWe recently kicked off the most outrageous initiative in the history of investment research. It’s called the Income Millionaire Project. And the goal is simple: create 1,000 income millionaires. That’s a $1 billion goal! No one has ever tried it before, but that doesn’t bother me. I’m so sure you can use this program to make a million bucks… I’ll pay you $1,000 to start your journey. Go here for details.

 

A High Short Interest Ratio is a Red Flag Warning

By Jim Fink on April 19, 2018

Short sellers sell stock that they don’t own in the hopes of buying it back for a much lower price at a later date. Several studies have concluded that short selling reduces market volatility and improves liquidity. For example, Yale professor Owen Lamont wrote in Go Down Fighting: Short Sellers vs. Firms (2004):

Many of the sample firms are subsequently revealed to be fraudulent. Thus the short sellers are identifying firms having bad fundamental value. This paper has presented a rogues gallery of shady characters, ranging from Charles Keating to Adnan Khashoggi. In public battles between short sellers and firms, short sellers usually are vindicated by subsequent events. The evidence suggests that short sellers play an important role in detecting not just overpricing, but also fraud. Policy makers might want to consider making the institutional and legal environment less hostile to short sellers.

Lamont discusses examples of companies that sue short sellers for stock manipulation and found that such companies underperform the general market by 25 percent in the year following their lawsuits. His advice is to avoid companies that sue short sellers. All one has to do is look at the price performance of companies such as Solv-Ex, Overstock.com, St. Jude Medical (subsequently acquired by Abbott Laboratories), Eros International plc, and Biovail (subsequently acquired by Valeant Pharmaceuticals) — after they sued short sellers to conclude that short sellers were right.

Long-only stock buyers should welcome short sellers because their selling pressure lowers the price of stocks and makes them more affordable to purchase. Furthermore, when short sellers cover their positions (i.e., buy back the stock they initially sold) their buying pressure increases the value of the stocks already owned. What’s not to like?

Short Sellers are the Smart Money: Pay Attention to Short Interest Ratios

The benefit of short selling goes beyond increased trading liquidity, however. It turns out that short sellers are on average an extremely smart group of equity analysts and it pays to be aware of what they are shorting. You’ve got to be smart to survive as a short seller given all of the impediments regulators place in their way, not to mention the hostility of companies that sue them and the risk of short squeezes when lenders of stock decide they want the stock back. The Economist magazine calls the life of a short seller “nasty, brutish, and short.” But the best short sellers survive and thrive and are considered the “smart money.”

A 2004 MIT and Harvard study entitled Short Interest and Stock Returns concluded that

Our results indicate that the only class of stocks that reliably produce negative abnormal returns is that of small cap firms with extremely high short interest ratios. An investor selecting stocks for a portfolio should avoid stocks with a high short interest ratio. If an investor already owns a stock that develops sustained high short interest, the clear and strong advice is to sell the stock immediately.

“Short interest ratio” is defined as the number of shares shorted divided by the number of shares available for trading (i.e., the public float). The study found that stocks with the highest short interest ratios (99th percentile) underperformed on average by 125 basis points per month (15% per year). To qualify for the 99th percentile, the stock typically has a short interest ratio of 20% or higher.

You can find the stocks with the highest short interest ratios by clicking here. Focus on Nasdaq stocks because the study found that the negative relationship between short interest ratios and subsequent performance is strongest with Nasdaq stocks.

Stocks with the Highest Short Interest Ratios

Below is a list of the 10 stocks with a market cap of at least $250 million that have the highest short interest ratios:

Company

Shares Shorted

Public Float

Short Interest Ratio

Applied Optoelectronics (NSDQ: AAOI)

14.54 million

18.15 million

80.12%

Rent-A-Center (NSDQ: RCII)

27.79 million

42.75 million

65.01%

Carvana Co. (NYSE: CVNA)

10.51 million

16.76 million

62.70%

Match Group (NSDQ: MTCH)

29.16 million

48.99 million

59.52%

Dulutch Holdings (NSDQ: DLTH))

5.82 million

9.87 million

58.98%

Dillard’s (NYSE: DDS)

6.91 million

11.76 million

58.73%

Gogo (NSDQ: GOGO)

29.50 million

56.42 million

52.28%

Lannett Company (NYSE: LCI)

16.12 million

33.33 million

48.38%

MiMedx Group (NSDQ: MDXG)

49.15 million

102.59 million

47.91%

SeaWorld Entertainment (NYSE: SEAS)

25.30 million

54.25 million

46.63%

Source: Bloomberg

Buy Calls or Buy Puts, Depending on Whether You Believe the Short Sellers

Short sellers aren’t always right, so some of these stocks might turn out to be good investments. But with this significant short-selling chip on their shoulders, avoidance is the easy solution for conservative investors. Traders can consider buying put options if they believe the short sellers are right. 

I respect high short interest ratios, but an investor must also have the confidence to go against the short-seller crowd when she feels they are wrong. When short sellers are wrong, they are really wrong and short squeezes can cause stocks to skyrocket higher.  In the list above, both Carvana Co. and Match Group are rocketing higher and causing short sellers a lot of pain. Traders looking to profit from a short squeeze can consider buying in, either through stock or call options, but substantial due diligence research is recommended prior to pulling the trigger.


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Stock Talk

  1. avatar
    Andy Reply April 29, 2018 at 4:12 AM EDT

    Tesla seems like a prime candidate for a bear call spread. The channel established in 2014, between $180 & $280 had been pierced in Mar 2017 to make new highs. Now, with production woes, mounting debt coming due, unprofitable sales, and a cash burn that is bound to force the company back into raising cash – it looks like Tesla is going back into the channel.

    Even the fanboys may not be able to fight back rising interest rates that seem to undermine earning calls with good results. Tesla’s market cap is billions higher than Ford – but Ford actually produces millions of cars, and for a profit to boot.

    Elon has pledged support millions of shares to secure loans, and the federal government may not be as generous as the last administration. Elon is scrapping robots and hiring 24/7 workers – what will that do to margins? There’s no refund on the robots. I find it im-ossible to believe that the stock could rise out of the upcoming earnings call, because aren’t any. How much is hype worth?

    I’d love to see Investing Daily tackle Tesla in an article.

  2. avatar
    Rick W. Reply April 19, 2018 at 9:30 AM EDT

    Thank you for this article, I found it to be especially enlightening and useful.