The stock market is a wonderful thing. Mechanisms are in place to profit from both the good times and the bad. Personally, I haven't shorted a stock in years. That doesn't mean that I can't make the most of short interest data that the exchanges put out twice every month.
I approach shorting activity as a bull the same way that a bear would assess the masses fleeing into particular stocks. They see tops. I see bottoms. If the argument is that once everyone has bought a stock that the upside is limited to recruit new buyers, wouldn't that work the other way around?
In fact, it can be the mother of all short squeezes when bears exit a short position en masse, because it entails buying back the number of shares they shorted to close out their positions.
What I'm trying to say is that I like to mine for stock picks where the pessimism runs the deepest, because there is great potential for major upside if the companies begin turning things around.
The best stat to watch to gauge this percolating pessimism is the short interest ratio. What's that? Well, if you divide the number of shares being shorted by the average number of shares that trade in a single day, you're there. A stock that typically has trading volume of about 100,000 with a million shares sold short would, theoretically, take 10 days to cover (hence, the short interest ratio is 10).
Let's go over a few stocks I like that have unusually high short interest ratios at the moment.
|
Short Shares |
Avg. Daily Volume |
Days to Cover |
|
|---|---|---|---|
|
LoopNet |
10.4 million |
196,970 |
53 |
|
Shutterfly |
5.1 million |
220,195 |
23 |
|
VistaPrint |
16.5 million |
722,424 |
23 |
|
The Knot |
4.5 million |
215,986 |
21 |
LoopNet
When residential real estate took a tumble, the market figured that commercial real estate would be the next shoe to drop. LoopNet runs the country's most-trafficked commercial real estate website, attracting roughly a million unique visitors monthly to explore the $500 billion worth of property listings available.
No one is going to argue that commercial real estate is being pinched, but that's what makes an online marketplace like LoopNet so important to those with properties to sell. Exposure through LoopNet, and paying a premium to stand out in the listings, is the key.
Even with the website gaining more penny-pinching free users over the hardcore paying accounts, Rule Breakers recommendation LoopNet is still growing. Revenue and pre-tax operating profits surged 41% and 31%, respectively, during the final quarter of 2007. Will its first-quarter report later this month be as good? Of course not, but the stock is already discounting that, as it's now trading at less than half of last year's high. We've seen that Bankrate
Shutterfly
When anyone asks me where I took the family on vacation this past summer, I don't just tell them. I whip out the keepsake photobook I made through Shutterfly. It's not just about a picture telling a thousand words. Handing over a stack of same-sized prints is cold, and old school scrapbooks can get clunky.
I know that Shutterfly is doing well, because I'm starting to get more of the photographic holiday cards and event invitations made through them. The company's fourth-quarter numbers found revenue and earnings growing 49% and 26% higher, respectively. Yes, the numbers imply margin contraction. That will continue into 2008, with earnings not expected to grow as quickly as the 31% to 37% top-line spurt. There are more Shutterfly clones out there, and competitors like Hewlett-Packard
VistaPrint
A kissing cousin to Shutterfly is VistaPrint, the leading online site for low-cost personalized corporate products like business cards, brochures, branded pens, car door magnets, and more. The company has come a long way since its start when it practically gave away business cards and address labels to get noticed.
Financially speaking, VistaPrint is profitable and growing. This may seem like a low markup business, but the company generated double-digit net profit margins on a huge 64% revenue gain this past quarter. With 39% of its business coming outside of the United States, it's not as if the company's fortunes are tied explicitly to domestic brand merchandising. Besides, if things get tighter in this space, wouldn't Shutterfly and VistaPrint make perfect merger partners?
The Knot
Matrimonial planning hub The Knot was a bit of a wedding crasher on Valentine's Day. The company's fourth-quarter financials saw revenue inch just 12% higher with pre-tax profits falling by 6%. Folks still get married and pregnant in recessionary times, but if they're spending less out of necessity on their special days, so will the providers in marketing their services.
Wall Street doesn't expect the lull to last. They see the company earning $0.41 a share this year, with a more robust pop to $0.60 a share come 2009. That's a pretty big spurt for a company trading at just 17 times next year's guesstimate. Naysayer shorts obviously don't believe the company will meet those targets, but it would be hard to justify betting against the company if it did given its pivotal role in attracting more than 3 million unique monthly visitors with money to spend on weddings.
Like LoopNet, The Knot has also been recommended to Motley Fool Rule Breakers subscribers. Obviously, the growth stock newsletter doesn't have a problem going against the herd. It's actually one of the catalysts that David Gardner often looks for, because built-in skepticism translates into that much more potential upside if things go right.
