8 Rallying Stocks Targeted by Short Sellers

When the S&P 500 peaked at 1200 back in April, it felt like the financial world was ready to celebrate and call an official end to the recession. But they would've popped the champagne a bit too soon. Shortly thereafter, the market flatlined, tumbling to just above 1000 by mid-summer. Since September, the S&P has been on a good run, and it continues to climb.

The upward momentum can't last much longer, according to many financial commentators, who cite several compelling reasons this rally's days may be numbered. For one, China's raising interest rates, which could mean a drop-off in consumer buying -- bad news for the U.S., since we've been counting on China's rapid growth to bolster our own economy.

And lest we forget, the housing crisis continues to drag on, with no end in sight. Fearful of being challenged on lending practices, banks are likely to be even more selective when doling out new loans -- and when lending slows, so do housing sales. When you add to this the disappointing earnings news rolling in, things aren't looking so rosy for Wall Street's immediate future.

How do you know which rallying stocks are about to plummet? Paying attention to short-sellers' trades can be a good way to get clued in. When an investor "goes short," he's actually betting on his stock to lose. A short-seller borrows shares from other investors and sells them on the open market. Eventually, he has to return them, and closes the short by buying back the shares he initially borrowed. If he can buy back the stock at a lower price, he turns a profit.

So if you start seeing a flurry of short-sale activity around a rallying stock, you may want to think twice before buying. Short-sellers take on unlimited risk -- if the stock keeps rising, they keep losing -- so they have to have quite a bit of conviction in their research. Meaning if they're shorting a stock, there's probably a good reason.

Here is a list of eight stock rallies being targeted by short-sellers. The shorts think these rallies are going to reverse -- how about you? (Click here to access free interactive tools to analyze these ideas.)

Company

Short Trends Between 6/30 and 9/30

Performance Over Last Year

BBVA Banco Frances (NYSE: BFR  ) Short ratio increased from 0.7 to 1.1, with shares shorted increasing from 80,625 to 246,244

86.23%

Banro (NYSE: BAA  ) Short ratio increased from 1.0 to 2.1, with shares shorted increasing from 94,680 to 236,238

10.00%

Zhongpin (Nasdaq: HOGS  ) Short ratio increased from 3.0 to 6.8, with shares shorted increasing from 1,780,000 to 3,120,000

26.70%

United Rentals (NYSE: URI  ) Short ratio increased from 3.7 to 7.3, with shares shorted increasing from 6,390,000 to 9,650,000

67.15%

Rightnow Technologies (Nasdaq: RNOW  ) Short ratio increased from 2.9 to 5.7, with shares shorted increasing from 750,715 to 978,345

78.56%

Lindsay (NYSE: LNN  ) Short ratio increased from 9.5 to 13.1, with shares shorted increasing from 1,730,000 to 2,130,000

72.58%

American Commercial Lines (Nasdaq: ACLI  ) Short ratio increased from 16.7 to 27.6, with shares shorted increasing from 1,550,000 to 1,870,000

29.35%

Gymboree (Nasdaq: GYMB  ) Short ratio increased from 7.5 to 10, with shares shorted increasing from 5,740,000 to 6,820,000

40.06%

Short trends data sourced from AOL Money. The list has been sorted by change in shares shorted.

Interactive Chart: Press Play to see how annual returns have fluctuated over the last two years.


Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.

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  • Report this Comment On October 26, 2010, at 4:50 PM, EllenBrandtPhD wrote:

    First of all, the New York stock of Banro (BAA) is literally irrelevant. Virtually all the ownership is in BAA.TO in Canada.

    That being said, in the Gold stocks, we actually like seeing a little more short selling, because there tends to be so little of it.

    When the Shorts get burned - as they inevitably do - the ones they've shorted move up way faster than the ones they haven't. (Case in point: CDE.)

    Fundamentally, this is very close to the time to be loading up on Banro, not the opposite - which is what virtually all the major Canadian investment houses have been doing.

    It is four quarters away from the official opening of its first major mine - of four already in the works - but initial production will probably start in three quarters.

    And like GG and AEM before it, BAA owns not just "mines," but an entire very rich mining district, less than 10 percent of which has even been looked at in a cursory fashion.

    Analysts across the board say a MINIMUM successful takeout bid for BAA would have to come in above 8.50 a share in this Gold environment.

    If you think Gold is going to reach 1800 over the next few quarters, which John Embry, Eric Sprott, and Goldman Sachs, among others, do, that makes the minimum takeout price for BAA come in at above 13 per share.

    That's just a gauge of value, because I don't think BAA wants to be taken out completely.

    They might, however, welcome a thirty percent investment or so from - Oh, I dunno! - Gold Fields? African Barrick? Lundin? Freeport? the Chinese? the Kazakhs? Which means that minimum takeout price - 8.50 plus at current levels, 13 plus at Gold 1800 - might apply even quicker than many now imagine.

    Do not rely on my analysis, by the way. Talk to any analyst - they're virtually all in Canada or Africa - who knows this stock.

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