Investor sentiment is a constantly changing machine that shifts with every new piece of information. A stock can be shrouded with analyst pessimism one day and rally the next on a promising new announcement.
But there is also persistence in investor psychology that causes optimism to build on optimism and pessimism to build on itself, leading to so-called "excessive" optimism or pessimism. This is especially apparent in short-selling.
Short-selling is a strategy to cash-in on a stock dropping in price: the short-seller borrows shares today, immediately sells them, and then buys them back at a future date (and hopefully at a lower price) to return them to the owner and keep the difference as profit. The number of shares shorted indicates how bullish or bearish those investors currently are on a company.
When a stock becomes highly shorted amid deep pessimism, it can reach a sort of tipping point referred to as a "short squeeze." There are so many shares currently shorted that any bump up in price triggers a cascade in which short-sellers have to cover their positions by buying back the stock, which causes the stock to rally even further. Bears roar, and then shorts fall.
Interested in trading this trend? Here is a list of 10 stocks that are already seeing short covering, with significant decreases in shares shorted month-over-month. We screened these stocks for those that have also seen significant net insider buying over the last six months.
Use this list as a starting-off point for your own analysis. List sorted by net insider purchases as a percent of share float. (Click here to access free, interactive tools to analyze these ideas.)
1. Patriot National Bancorp (Nasdaq: PNBK ) : Provides consumer and commercial banking services to individuals, small and medium-sized businesses, and professionals in Connecticut and New York. Market cap of $69.05M. Shares shorted have decreased from 222.60K to 160.80K month-over-month, a change representing 2.70% of the company's 2.29M share float. Net insider shares purchased over the last six months at 141.09K, which is 6.16% of the company's 2.29M share float. It's been a rough couple of days for the stock, losing 7.69% over the last week.
2. Auxilium Pharmaceuticals (Nasdaq: AUXL ) : Operates as a specialty biopharmaceutical company primarily in the United States. Market cap of $778.23M. Shares shorted have decreased from 8.98M to 7.16M month-over-month, a change representing 4.14% of the company's 43.92M share float. Net insider shares purchased over the last six months at 973.07K, which is 2.22% of the company's 43.92M share float. The stock has had a good month, gaining 11.39%.
3. Skilled Healthcare Group (NYSE: SKH ) : Operates skilled nursing facilities, assisted living facilities, hospices, home health providers, and a rehabilitation therapy business. Market cap of $168.43M. Shares shorted have decreased from 2.53M to 2.03M month-over-month, a change representing 2.61% of the company's 19.18M share float. Net insider shares purchased over the last six months at 246.10K, which is 1.28% of the company's 19.18M share float. It's been a rough couple of days for the stock, losing 9.96% over the last week.
4. ChinaCast Education (Nasdaq: CAST ) : Provides post-secondary education and e-learning services in China. Market cap of $215.07M. Shares shorted have decreased from 7.65M to 5.03M month-over-month, a change representing 8.38% of the company's 31.25M share float. Net insider shares purchased over the last six months at 317.80K, which is 1.02% of the company's 31.25M share float. Might be undervalued at current levels, with a PEG ratio at 0.65, and P/FCF ratio at 7.04. The stock has lost 32.98% over the last year.
5. Primo Water (Nasdaq: PRMW ) : Provides multi-gallon purified bottled water, self-serve filtered drinking water, and water dispensers in the United States and Canada. Market cap of $149.14M. Shares shorted have decreased from 1.70M to 1.13M month-over-month, a change representing 2.95% of the company's 19.32M share float. Net insider shares purchased over the last six months at 190.0K, which is 0.98% of the company's 19.32M share float. The stock has had a good month, gaining 33.55%.
6. The McClatchy Company (NYSE: MNI ) : Operates as a newspaper publisher in the United States. Market cap of $119.28M. Shares shorted have decreased from 28.48M to 27.09M month-over-month, a change representing 2.87% of the company's 48.48M share float. Net insider shares purchased over the last six months at 318.80K, which is 0.66% of the company's 48.48M share float. This is a risky stock that is significantly more volatile than the overall market (beta = 3.25). The stock has performed poorly over the last month, losing 15.66%.
7. AOL (NYSE: AOL ) : Operates as a Web services company that offers a suite of brands and offerings for the worldwide audience. Market cap of $1.54B. Shares shorted have decreased from 20.67M to 14.82M month-over-month, a change representing 5.56% of the company's 105.22M share float. Net insider shares purchased over the last six months at 490.0K, which is 0.47% of the company's 105.22M share float. The stock has had a good month, gaining 22.07%.
8. Red Robin Gourmet Burgers (Nasdaq: RRGB ) : Develops, operates, and franchises casual-dining restaurants in the United States and Canada. Market cap of $430.50M. Shares shorted have decreased from 2.06M to 1.73M month-over-month, a change representing 2.61% of the company's 12.65M share float. Net insider shares purchased over the last six months at 34.70K, which is 0.27% of the company's 12.65M share float. It's been a rough couple of days for the stock, losing 6.83% over the last week.
9. TranS1 (Nasdaq: TSON ) : Focuses on the design, development, and marketing of products that implement its proprietary surgical approach to treat degenerative disc disease and instability affecting the lower lumbar region of the spine. Market cap of $78.77M. Shares shorted have decreased from 790.90K to 457.27K month-over-month, a change representing 4.05% of the company's 8.24M share float. Net insider shares purchased over the last six months at 12.38K, which is 0.15% of the company's 8.24M share float. It's been a rough couple of days for the stock, losing 8.96% over the last week.
10. China Medical Technologies (Nasdaq: CMED ) : Develops, manufactures, and markets immunodiagnostic and molecular diagnostic products. Market cap of $160.38M. Shares shorted have decreased from 6.32M to 5.80M month-over-month, a change representing 3.16% of the company's 16.44M share float. Net insider shares purchased over the last six months at 16.70K, which is 0.10% of the company's 16.44M share float. The stock is a short squeeze candidate, with a short float at 18% (equivalent to 16.47 days of average volume). The stock has lost 63.02% over the last year.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen does not own any of the shares mentioned above. Short data and insider data sourced from Yahoo! Finance, all other data sourced from Finviz.
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