Shorting a stock is a risky bet that its price will go down. The position is contrary to the stock market's history of rising more than falling, so unsuccessful short-sellers typically have short careers. Successful short-sellers are typically seasoned, savvy investors who do their homework and place real money on the line. On Wall Street, they're considered "smart money." That's why it's worth your time to know the short interest on any stock you own or research.
With double-dip recession worries heating up, which retail stocks are the short-sellers currently betting against? I ran a screen to find stocks in the sector with short interest greater than 25% of the float -- the total number of shares publicly owned and available for trading -- and market caps of at least $200 million. Here are the results:
Short Interest as a % of Float
Days to Cover Short
E-Commerce China Dangdang
Barnes & Noble
Source: Capital IQ, a division of Standard & Poor's.
Days to cover short is another way of gauging short interest. It compares the number of shares short to the average trading volume. The higher the number, the more trading days are needed for all the short-sellers to get out of their positions, and the more risky the short bet.
As a basis for comparison, short interest as a percentage of float is 2.1% for Wal-Mart and would require 3.3 days to cover. Short interest on Amazon is 2.2% of float and would require 1.8 days to cover.
While there is more to successful investing than watching short interest, shorting a stock is a risky bet. Short-sellers typically do their homework and attempt to place their positions only when they think a stock has more downside risk than upside opportunity. That's why it pays to see if short interest is in line with your investment thesis. To help you monitor your investment risks, The Motley Fool recently introduced a free My Watchlist feature. You can get up-to-date news and analysis by adding companies to your watchlist now:
Fool contributor Cindy Johnson does not own shares in any security in this story. The Motley Fool owns shares of PetMed Express, Wal-Mart, Lumber Liquidators, and Blue Nile. Motley Fool newsletter services have recommended buying shares of Blue Nile, Lumber Liquidators, hhgregg, Wal-Mart, and Amazon.com. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart. 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.