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
Some of the names may be new to you. For instance, solar module maker First Solar
Short Interest as % of Shares Outstanding
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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.
Otherwise, if you're simply on the hunt for a handful of great companies to invest in, there's a new free report you've got to see. In it, you'll find three great global brands that are growing roots in the biggest emerging markets and exposing shareholders to decades of future growth. To discover the identity of these companies, click here now -- the report is absolutely free.
Fool contributor John Maxfield does not own shares in any of the companies mentioned above. The Motley Fool owns shares of SUPERVALU and First Solar. Motley Fool newsletter services have recommended buying shares of First Solar and Netflix, as well as buying calls on SUPERVALU. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.