10 Stocks Traders Love to Short

There are two sides to every trade. On the long side, investors bet that a stock will increase in value. And on the short side, as you may have guessed, investors bet that a stock will decrease in value. While we typically advise investors against "going short," it's nevertheless interesting to see which stocks have caught the eye of those who do.

One of the most interesting shorts in recent years was memorialized by hedge fund manager David Einhorn in Fooling Some of the People All of the Time. Einhorn's book presented his case against Allied Capital, a business development company that Einhorn believed was using illicit accounting tactics to inflate asset values and delay loss recognition. While I don't mean to ruin the story for those of you interested in reading the book, the SEC ultimately agreed with Einhorn, finding that Allied had violated record-keeping and internal-controls provisions of securities laws relating to the valuation of illiquid securities.

Although Einhorn's book about Allied Capital concerned an isolated incident, it nevertheless illustrates the broader value that short-sellers bring to a market. And it's for this reason that I compiled a list of the 10 most-shorted stocks on the S&P 500 (for previous lists like this, read Fool managing editor Brian Richards' columns here and here).

The most-shorted stocks
Many of the names on this list will be familiar to you. There's Netflix (Nasdaq: NFLX), which fell from grace last year after CEO Reed Hastings' late-night, come-hither email addressing the company's since-abandoned decision to split into two separate companies -- one for streaming, the other for its traditional DVD-by-mail business. There's United States Steel (NYSE: X), which was crushed in the economic downturn and now trades for a fraction of its former self -- 17%, to be precise. And finally comes Pitney Bowes (NYSE: PBI), the struggling provider of mail processing equipment and favorite of income investors with its monster 7.8% dividend yield.

Some of the names may be new to you. For instance, solar module maker First Solar (Nasdaq: FSLR) didn't gain a wider following until the political debacle surrounding Solyndra. It made headlines more recently with disappointing guidance numbers for 2012. And while supermarket operator SUPERVALU (NYSE: SVU) runs well-known chains like Albertsons and Shoppers Food & Pharmacy, it's often overshadowed by rivals like Safeway and Kroger -- though it was recently recommended by Fool analyst Jim Royal as a Rising Star buy.

Source: Finviz.com.

As you can see, this list focuses on short interest. For our purposes, this is the number of shares sold short relative to the total number of shares outstanding for a particular stock. In terms of GameStop, for example, this list tells us that almost one-third of its outstanding shares are sold short. While this doesn't necessarily mean that the bricks-and-mortar gaming store is a bad investment -- and you can apply this to any of the stocks in the list -- it should give investors on the long side pause.

Should you short?
If you're thinking about taking a short position like many investors have in the 10 stocks named above, then I strongly recommend that you read our multipart series on the promise and perils of short-selling. It starts with a brief introduction of the art by Fool analyst Dan Caplinger, proceeds through two roundtable discussions by various Fool contributors (here and here), and includes specific ways to short using options and exchange-traded funds.

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