3 Stocks You Should Stop Hating

The bears are everywhere these days. Market volatility can bring out the Nervous Nellie in a lot of us. Nowhere is that market pessimism more obvious than in the list of stocks with the highest short interest ratio.

What is short interest ratio? Well, it's essentially the number of shares sold short in a particular company divided by the stock's average trading volume. It's an important metric, and I'll tell you why.

Let's try Odyssey Marine Exploration (Nasdaq: OMEX  ) on for size. The company has nearly 5 million shares sold short, 111 times its average trading volume of a measly 44,752 shares. Because sales shorted are essentially sold first and bought back later, the positions have to be ultimately closed. Shorts feel that stocks will be worth less later -- if not completely worthless -- and sometimes they're right.

However, short sellers aren't necessarily any more sophisticated than long buyers. They may have a higher risk tolerance and sound valuation arguments for their bearish ways, but it can still be an emotional response. There were more than 40 million shares of Amazon.com (Nasdaq: AMZN  ) sold short heading into last week's blowout second-quarter report that made the bears poorer.  

Odyssey Marine is a risky company. It's a deep-sea exploration firm, trolling waters for buried shipwreck treasures. It's only natural to draw skeptics. The concern for shorts, though, is what would happen if they should all decide to punch out at the same time. The 111 "days to cover" metric that is synonymous with the short interest ratio term doesn't mean that it would take nearly four months to cash everyone out. They will buy to cover, and the stock will trade for far more than its daily average. That creates what they call a "short squeeze," with the shares being bid higher along the way.

Three heavily shorted stocks that can pop higher 
Bears nail it, but sometimes they get hammered. I'm a fan of three stocks that have unusually high short interest ratios right now. Let's dig in.

Marchex (Nasdaq: MCHX  ) -- Marchex has more shorts than domain names, and that's saying something since the company owns a portfolio stocked with more than 200,000 domain names.

With dot-com real estate like debts.com, resorts.org, and enough five-digit domains to cover 96% of the country's ZIP codes, Marchex also powers the contextual advertising found on financial websites -- including Fool.com -- through its IndustryBrains subsidiary.

Despite sitting on rich virtual real estate, Marchex has disappointed investors in the past. However, that is mostly the result of halfhearted attempts to monetize the sites by simply serving up bland landing pages. Sure, those pages were loaded with lucrative ads, but there wasn't a whole lot in rich content to keep visitors coming back for more or to rank high on search engine results. Recent content-populating initiatives are addressing that shortcoming. The results may not be immediate, but it's really a matter of time before Marchex begins living as large as its domain portfolio.

TheStreet.com (Nasdaq: TSCM  ) -- Having been a part of The Motley Fool for a dozen years now, it's obvious that I am passionate about the importance of online financial websites that enlighten and empower individual investors. So maybe I'm biased in rooting for TheStreet.com, even though some may see it as a rival.

Last week's quarterly report was a mixed bag. Revenues climbed 20%, though earnings growth stalled. Higher ad revenues offset a flattish showing in the company's premium subscription services. That may not look so good on the surface. Weren't newsletters supposed to save the day for Internet stock sites?

Well, TheStreet.com is growing elsewhere, especially in areas like syndication and nonfinancial advertising. The latter is a category that should only continue to grow with next year's launch of MainStreet.com, a mainstream news site that will feed into the company's financial flagship.

Take-Two Interactive (Nasdaq: TTWO  ) -- No one is naughtier than Take-Two when it comes to video games. If it's not offending educators with bullying games or watching its marquee title get pulled from stores for graphic content that can be unlocked, it hits rock bottom by having to pull a game this summer -- Manhunt 2 -- before it was even released.

The company's latest financials are a mess, and you may as well don riot gear to work your way through restated numbers. However, Grand Theft Auto IV is coming out later this year. The company's telltale franchise will enhance the release by putting out future episodes through high-margin digital distribution.

I understand why bears drool at the company's recent miscues, but they'll be in for a world of hurt if Grand Theft Auto IV is the hit that nearly everyone expects it to be.

Playing it short
Maybe we're not talking about perfect companies here. However, all three have catalysts that can turn their fortunes around in a hurry. If I'm right, the short covering rallies may be substantial.

Short shares

Avg. Daily Volume

Short-Interest Ratio

Marchex

11.5 million

375,330

31 days

TheStreet.com

4.7 million

138,853

34 days

Take-Two

25.9 million

1,225,773

21 days

Obviously there is no guarantee that a short squeeze will take place. If these companies flounder, it's just a matter of riding them down to zero. But I don't see that happening. In fact, I think shorts are playing lose-lose games here. If the stocks rise, the pain to the shorts is clear. If the stocks begin to drop, they would become attractive acquisition targets. 

In short, don't hate on companies with open-ended catalysts. Seek out short candidates that appear irreparably damaged or destined to shrink even further. That just doesn't apply to these three. A little optimism today can spare a ton of hurt in the future.

Amazon.com is a Stock Advisor selection. You'll find several young growth stocks bent on defying the skeptics in theRule Breakers newsletter service. Learn more about either premium stock research offering with a free 30-day trial subscription.  

Longtime Fool contributor Rick Munarriz isn't tall, but he's not going to short these stocks. He does not own shares in any company mentioned in this story. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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8/22/2014 3:29 PM
AMZN $332.14 Down -0.77 -0.23%
Amazon.com CAPS Rating: ***
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