Short-selling is an important part of the stock markets. It gives investors an opportunity to make pessimistic bets alongside the usual optimistic ones, and to hedge their long positions.
Shorted shares also serve as a barometer of hated and controversial stocks. When share prices skyrocket for no good reason, short-sellers gather in big, cheering crowds. Likewise when management makes huge missteps and Mr. Market overlooks the transgression.
On the other hand, shorted shares disappear when market values start to align with real business fundamentals. Let's have a look at three shares that scared away the shorts in December.
JDS Uniphase
According to Nasdaq records, optical networking specialist JDS Uniphase (Nasdaq: JDSU) had 10.7 million shares sold short as of Dec. 15. Two weeks later, the month closed out with just 6 million shares on the pessimistic side of the fence. With a massive 229 million shares on the open market, it was never a massive short position -- but it's significant any time the negative bets drop by 44% in such a short time.
How did the Canadians scare off so many critics? Well, the share price climbed more than 14% between the reporting milestones. A move like that will force some pessimists to cover their shorts, either for fear of losing a potentially unlimited amount of money or due to outright margin calls.
Now, that surge happened entirely without help from JDSU itself. It was a remarkably slow news period for the company, though you could argue that investors jumped for joy when AT&T (NYSE: T) gave up on its audacious plan to buy T-Mobile USA. Fellow equipment maker Alcatel-Lucent and optical component expert Finisar also jumped sky-high when that deal fell apart. Suddenly, there's a market for telecom-grade infrastructure equipment again!
So this was a sector effect and not a vote of newfound confidence in JDSU itself. The stock is still down nearly 35% year over year, and short-sellers made plenty of money on the way down from 52-week highs around $29 to today's $11.40. I'm a long-term bull on this stock, but you never know what will happen from one month to the next on this roller coaster. Add JDS Uniphase and Finisar to your watchlist so you can keep a watchful eye on the optical networking industry -- the shorts may very well come swarming back now that shares are getting expensive again.
Green Mountain
The coffee shop tells a very different story. Green Mountain Coffee Roasters (Nasdaq: GMCR) hit the middle of December with 27.3% of its float sold short and left the month with a still enormous 21.6% negative position.
Fueled by the preposterously successful Keurig K-Cup system and its single-serve bean supplies, Green Mountain climbed an astonishing 1,100% in three years before hitting the skids last September. Shares are down nearly 60% since then, and the shorts are locking in their profits here.
This time it's personal. Coffee titan Starbucks and Keurig-agnostic Peet's Coffee & Tea have both avoided Green Mountain's recent carnage, even beating the market by a fair margin in Starbucks' case.
A lot of investors still watch Green Mountain with a jaundiced eye, waiting for Keurig to be exposed as a fad and shares to sink even further. Our Rule Breakers team doesn't agree at all, calling the stock an opportunistic buy these days. Find out why with a totally free 30-day trial pass to our hyper-growth service.
DryShips
The years have not been kind to bulk shipper and erstwhile oil driller DryShips (Nasdaq: DRYS).
Shares have plunged 98% since the spring of 2008 and 58% in the last 12 months. Shipping just ain't the cash cow it used to be, and management keeps plugging holes in the dam, one finger at a time. And yet, the Altman Z measure of bankruptcy risk remains a hazardous 0.47.
Most of the big bears have taken their shorting contracts and gone home by now; most of the profit has already been made. Eighteen months ago, the short ratio stood at 8%; this December, another 1.5 million shorted shares were covered to land the company at just 3.2% sold short.
Even at these low prices, Wall Street analysts and our CAPS community alike are pretty neutral on DryShips. If the stock ever climbs back to pre-crash levels, you'll have a truly massive return on your hands -- but that's not a terribly likely outcome. Rather than betting on this risky stock, you should check out the retailer we've pegged as the single best stock to own in 2012. That report is totally free, but only for a limited time -- get yours right here before it's too late.
