Insiders vs. Short-Sellers: Highly Shorted Stocks Backed by Insider Buying

Short-sellers, by definition, bet on their stocks to lose, selling high in order to buy them back low. They essentially "borrow" shares from other investors, sell them on the open market, and eventually close the short by buying back the shares. If they can buy at a lower price than they sold, they turn a profit off the difference.

In other words, if short-sellers are flocking to a stock, it means they're expecting to see its share price drop -- and that's exactly what long-term investors don't want. But counterintuitive though it may seem, a flurry of short activity around a stock can sometimes boost the stock price.

Remember, short-selling carries a lot more risk than a buy-and-hold strategy. Since there's no cap to how high a stock can climb, there are also no bounds on the extent of the investor's loss. So most short-sellers take preventative measures to limit their downside, by pre-selecting an "uncle point," a price at which they must buy back the stock before it spikes any higher.

And when a substantial number of short-sellers are all forced out of a position at the same time, it creates more demand for the stock. And since every trader has a different "uncle point," you could potentially see a domino effect -- each time it hits a new price level, it sends off another rounds of triggers, squeezing the stock higher and higher.

A high amount of short interest can potentially be a windfall for investors going long on the stock -- as long as it defies short-sellers' expectations. So we came up with a list of highly shorted stocks that have seen a lot of insider buying over the last six months.

Since company management knows more about their own businesses than anyone else, it's not a bad idea to pay attention to their trades. They're feeling pretty optimistic about these stocks -- does this mean that the short-seller crowd will be squeezed out? (Click here to access free, interactive tools to analyze these ideas.)

Short trends and insider buying data sourced from Yahoo! Finance. The list has been sorted by the change in insider ownership over the last six months.

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. Note: The numbers on top of items represent the forward P/E ratio, if available.

Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.