When market sentiment becomes extreme, investors usually run in two directions: one to buy and the other to sell. Those (small-f) foolish enough to buy into a company when all signs suggest selling, or to sell a stock when all signs suggest buying, identify with the term "contrarian."
A contrarian investor tends to bet against the trend, believing as Mark Twain once said, "whenever you find yourself on the side of the majority, it is time to pause and reflect."
Specifically within the realm of investing, a contrarian investor acts on the belief that heavy pessimism might signal a stock is oversold or undervalued, creating an investing opportunity before the market value corrects itself. Similarly, excessive optimism might indicate a stock is overvalued.
However, identifying instances where investor sentiment becomes so extreme that they feel a turnaround is imminent is no easy task. It can be a difficult thing for investors to master.
Short squeeze candidates
The short float of a company is the percentage of shares in a short position (being short sold by short-sellers) as a percentage of the total amount of shares available on the market (share float). Short-sellers make money when the share price of a stock falls. Therefore, if the short float is high, and getting higher, short-sellers are really confident that the share price is going to fall.
Because investors frequently pay attention to the behavior of short-sellers, a high short float could make investors nervous about a stock, which might in turn cause the share price to fall (like a self-fulfilling prophecy).
But here's the contrarian angle: When a stock becomes highly shorted amid deep pessimism, it can reach a sort of tipping point referred to as a "short squeeze." There are so many shares currently shorted that any bump up in price triggers a cascade in which short-sellers have to cover their positions by buying back the stock, which causes the stock to rally even further. Bears roar, and then shorts fall.
Business section: Investing ideas
All of the stocks mentioned below have high short floats and have seen a significant rise in shares shorted. In other words, short-sellers have positioned themselves for more downside over the coming weeks.
In addition, all the stocks have seen an increase in net institutional selling in the past six months. Institutions such as hedge funds typically have access to more detailed market research than the average investor, and it's one of the reasons they are sometimes referred to as "smart money" investors.
Short-sellers and "smart money" investors think these companies are in trouble. Is this pessimism justified? (Click here to access free, interactive tools to analyze these ideas.)
1. Harvest Natural Resources (NYSE: HNR): Engages in the acquisition, exploration, development, production, and disposition of oil and natural gas properties. Short float at 27.43%, which is equivalent to 16.38 days of average trading volume. Net institutional sales in the current quarter at -1.4M shares, which represents about 4.98% of the company's float of 28.11M shares. Shares shorted have increased from 8.59M to 8.95M over the last month, an increase which represents about 1.28% of the company's float of 28.11M shares.
2. hhgregg: Operates as a specialty retailer of consumer electronics, home appliances, and related services. Short float at 29.73%, which is equivalent to 14.8 days of average trading volume. Net institutional sales in the current quarter at -5.2M shares, which represents about 35.47% of the company's float of 14.66M shares. Shares shorted have increased from 7.93M to 9.02M over the last month, an increase which represents about 7.44% of the company's float of 14.66M shares.
3. athenahealth: Provides ongoing billing, clinical-related, and other related services to medical group practices primarily in the United States. Short float at 23.56%, which is equivalent to 10.89 days of average trading volume. Net institutional sales in the current quarter at -2.0M shares, which represents about 5.79% of the company's float of 34.52M shares. Shares shorted have increased from 6.33M to 8.20M over the last month, an increase which represents about 5.42% of the company's float of 34.52M shares.
4. Genco Shipping & Trading (NYSE: GNK): Engages in the ocean transportation of drybulk cargoes through the ownership and operation of drybulk carrier vessels worldwide. Short float at 21.86%, which is equivalent to 10.17 days of average trading volume. Net institutional sales in the current quarter at -4.6M shares, which represents about 20.38% of the company's float of 22.57M shares. Shares shorted have increased from 4.58M to 5.20M over the last month, an increase which represents about 2.75% of the company's float of 22.57M shares.
5. RAIT Financial Trust (NYSE: RAS): Operates as a self-managed and self-advised real estate investment trust (REIT). Short float at 15.19%, which is equivalent to 8.73 days of average trading volume. Net institutional sales in the current quarter at -28.4M shares, which represents about 77.05% of the company's float of 36.86M shares. Shares shorted have increased from 5.34M to 5.96M over the last month, an increase which represents about 1.68% of the company's float of 36.86M shares.
6. Wet Seal (Nasdaq: WTSLA): Operates stores that sell fashionable and contemporary apparel and accessory items designed for female customers. Short float at 15.64%, which is equivalent to 8.19 days of average trading volume. Net institutional sales in the current quarter at -5.5M shares, which represents about 6.87% of the company's float of 80.10M shares. Shares shorted have increased from 12.25M to 13.52M over the last month, an increase which represents about 1.59% of the company's float of 80.10M shares.
7. Ancestry.com (Nasdaq: ACOM): Operates as an online resource for family history for subscribers worldwide. Short float at 15.22%, which is equivalent to 7.14 days of average trading volume. Net institutional sales in the current quarter at -1.4M shares, which represents about 4.67% of the company's float of 29.96M shares. Shares shorted have increased from 6.30M to 6.66M over the last month, an increase which represents about 1.2% of the company's float of 29.96M shares.
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.
List compiled by Eben Esterhuizen, CFA. Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Institutional data sourced from Fidelity, short data from Yahoo! Finance.
