When the market keeps climbing nearly every day, it can be hard to remember that there are two sides to every trade. It might seem un-American to bet against a stock, but without short-sellers, we'd have no honest way of deciphering a company's perceived value in the marketplace. Short-sellers serve a secondary purpose as well, helping us sort out the weeds in a sea of green grass. It often pays to take notice when short-sellers are increasing or decreasing their positions in individual stocks, since that may signal an underlying problem or concern with a company's business. Let's take a look at three companies that currently command short-sellers' attention.
Beware of the Sith
It's been years since Overstock.com
What could these short-sellers be trying to tell us? I believe the lesson here is that Overstock is no Amazon.com
The company has also lost focus on its core business model: selling excess inventory at a discount. As Foolish contributor Rick Munarriz points out, the site not only sells overstocked items from third-party vendors, but also generates real estate leads, brings in revenue from on-site ads, and facilitates online auctions. With online competition increasing to sell down others' excess inventory, Overstock appears willing to expand into areas where it has little to no experience, at the expense of its gross margins. While I'd hardly call these short-sellers Sith Lords, it appears to me that Overstock is quickly reverting back to the Dark Side.
Reach out and short someone
What could the short-sellers be trying to tell us in this instance? Probably that expanding beyond a company's means, and taking on excessive amounts of debt, is bad. SBA Communications has racked up an impressive $2.8 billion in long-term debt to purchase wireless towers, and it's often taken significant charges to pay down debt early, adding to yearly losses.
In actuality, cash flow from SBA's leasing business has been strong, much like sector leader American Tower
Always bet on double zero
In the end, nothing regularly attracts short-sellers more frequently than biotechnology stocks. Biotech companies often share a common theme: They offer shareholders a high-risk/high-reward proposition. These businesses burn countless millions of dollars of cash in the hopes of striking it rich by getting a drug approved by the FDA. These stock market roulette wheels also draw rampant bouts of speculation; witness Regeneron Pharmaceuticals's
What are Regeneron's short-sellers trying to tell us? Perhaps that the company's current market cap of $2.8 billion might be a bit excessive for a company with too many questions still tied up in its pipeline. It does have one FDA-approved drug, Arcalyst, and two drugs currently in phase 3 trials, one of which involves using Arcalyst as a treatment for gout. But as Orexigen Therapeutics'
Looking at the amount of short shares outstanding can be a great tool in helping cast aside sector weak links. Keep in mind that high short ratios themselves don't tell us enough about a stock to base a trade on, but they should provide enough of a spark to promulgate further research.
Do you have an opinion on any of the companies mentioned here? Sound off in the comments section below!