Most investors own stocks in the hopes of seeing them rise in value over the years. But for short-sellers, betting against stocks is the name of the game, and profits come when share prices fall.
Short-selling has always had a somewhat questionable reputation among mainstream investors, with many companies prevailing on those negative attitudes to blame short-sellers for share-price declines. But often, short-sellers direct their efforts at companies that are fundamentally weak, and as a result, watching the short-interest figures that stock exchanges provide can clue you in to stocks that are especially risky or are facing major obstacles.
With that in mind, let's look at the four S&P 500 (SNPINDEX:^GSPC) stocks that have the highest percentage of their available share-float sold short, according to the latest available figures from S&P Capital IQ.
J.C. Penney (NYSE:JCP), short position: 55.5% of float and 25.6% of outstanding shares
This retailer's recent travails are well known, as J.C. Penney tried and failed to transform itself from a coupon-driven discount retailer to a more attractive destination for shoppers. With the Ron Johnson experiment having backfired, the company has recently started to move back toward its original focus, albeit trying to hang onto some of the progress it has made with store renovations and in-store specialty shops. Despite recent news that George Soros has taken a substantial position in the stock, short-sellers think that the retailer is doomed to eventual failure as its competitors have already taken advantage of its weakness.
GameStop (NYSE:GME), short position: 38.1% of float and 37.2% of outstanding shares
GameStop has seen its stock rise sharply recently, hitting five-year highs as bullish investors look forward to a new wave of video game consoles expected to hit the market in the near future. Yet even though new consoles will drive sales for GameStop in the short run, short-sellers are focused on longer-term challenges to the retailer's business model. With increased digital distribution from gamemakers and other measures that make reselling old unwanted games more difficult, GameStop could lose a big portion of its used-game inventory, which is a major profit center for the company.
First Solar (NASDAQ:FSLR), short position: 30.4% of float and 21% of outstanding shares
The solar industry has been hit hard by overcapacity, but First Solar shocked bears earlier this month with guidance on sales and earnings that was far above what industry analysts were expecting. Moreover, its purchase of TetraSun will help First Solar boost the efficiency of its solar modules, an area in which the company has long lagged some of its competitors. Short-sellers are feeling the squeeze as a result of much higher share prices recently, although the stock still trades well below its levels from early 2011. It'll be interesting to see whether they'll give in and cover their positions in light of the news.
U.S. Steel (NYSE:X), short position: 29.4% of float and 29.3% of outstanding shares
The steel industry has struggled for a long time, and the continuing sluggishness in Chinese growth has led to major questions about how long investors may have to wait before demand for steel, along with the related commodities that go into producing it, starts to rise. Even with the shares at levels below their 2009 financial-crisis lows, U.S. Steel still has short-sellers believing the stock can fall lower still.
Don't sell yourself short
Just because these stocks have high short interest doesn't mean that you should sell them automatically. But short-sellers are focused on the risks involved with these companies, and you should be fully aware of those risks if you intend to own shares of their stock.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool owns shares of GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.