Unlike most traders, short-sellers buck the axiom of "buy low, sell high" and do just the opposite. These investors trust their market savvy and bet that the price of the stock they are targeting is overvalued and due for a correction.
By essentially rooting for a company to lose money, "the shorts" have generated ire from a number of different outlets in recent years. The question emerges as to whether these actors are maliciously targeting certain companies or whether they aid the markets by providing much needed corrections.
In response to the profits that many short-sellers made as the stock market crashed in 2008, the Securities and Exchange Commission stepped in and issued new regulations banning one form of the practice, naked short-selling, and issuing new rules that now require the volume of short sales on each stock to be disclosed on a daily basis.
Taking advantage of these newfound disclosure requirements, the intelligent investor will notice the trend as to whether the shorts are saying a stock is worth purchasing or if you should stay away.
Business section: Investing ideas
Short-sellers view themselves as market makers, and certain studies suggest they may have a point. The data shows that when the short-sellers begin to move on a stock, a price decline usually isn't far behind.
Despite this, it remains unclear as to whether these traders are prophetic in their anticipation of a price fall or if their very presence in the market scares off all other investors.
With all this in mind, we created a list of companies on the Standard & Poor 500 index that have been experiencing the highest levels of short sales as a percentage of share float. They have also been increasing their short positions month over month. In other words, short-sellers are extremely pessimistic about their future prospects.
Here are our parameters for the list:
- Short float over 15%
- Increased short covering month over month
- Listed on the S&P 500 index
What do you think -- are short-sellers making the right call, or are they being overly pessimistic? (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Rebecca Lipman:
1. Frontier Communications
2. Kinder Morgan
5. Pitney Bowes
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 Dan Connellyand Rebecca Lipman not own any of the shares mentioned above. Short data sourced from Yahoo! Finance.