Shorting a stock is a risky bet that its price will go down. The position is contrary to the stock market's history of rising more than falling, so unsuccessful short sellers typically have short careers. Successful short sellers are typically seasoned, savvy investors who do their homework and place real money on the line. On Wall Street, they're considered "smart money." That's why it's worth your time to know the short interest on any stock you own or research.
Do they know something you don't?
Which computer hardware stocks are the short sellers currently betting against? I ran a screen to find stocks in the sector with short interest greater than 20% of the float -- the total number of shares publicly owned and available for trading -- and market caps of at least $200 million. Here are the results.
|
Security |
Short Interest As a % of Float |
Days to Cover Short |
|---|---|---|
| Meru Networks |
71% |
19.2 |
|
Power One |
31% |
8.78 |
|
STEC |
31% |
6.85 |
| L-1 Identity Solutions |
30% |
8.74 |
|
Synaptics |
28% |
21.5 |
|
Ocz Technology Group |
27% |
4.87 |
|
Hollysys Automation Technologies |
26% |
8.59 |
|
CIENA |
23% |
3.5 |
|
China Security & Surveillance Technology |
22% |
12.4 |
Source: Capital IQ, a division of Standard & Poor's, and The Motley Fool.
"Days to cover short"is another way of gauging short interest. It compares the number of shares short with the average trading volume. The higher the number, the more trading days are needed for all the short sellers to get out of their positions, and the more risky the short bet.
As a basis for comparison, short interest as a percentage of float is 1.1% for Cisco and would require only 0.8 days to cover. Short interest on NetApp is 5.7% of float and would require 3.4 days to cover.
Foolish takeaway
There's more to successful investing than watching short interest, and shorting a stock is a risky bet. Short sellers typically do their homework and attempt to place their positions only when they think a stock has more downside risk than upside opportunity. That's why it pays to see whether short interest is in line with your investment thesis. To help you monitor your investment risks, The Motley Fool recently introduced a free My Watchlist feature. You can get up-to-date news and analysis by adding companies to your Watchlist now:
