Short interest data released last week showed that many investors increased their bearish bets on several companies about to report earnings, losing money in the process. Earnings season is not yet over, however, and these investors may yet come out whole.

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Investors who short a stock borrow stock that they don't own, and sell it short, hoping to buy it back at a lower price. Many of these investors use earnings season to make short selling bearish bets on companies reporting earnings. Alcoa (NYSE:AA) officially kicked off earning season on July 8.

The latest data from Nasdaq is as of July 15, and shows the change from June 30. Total short interest rose by 4.1%. This implies that investors originally thought that earnings season would not be good, and increased short selling partly to hedge.

The largest increase in short interest was for E*Trade Financial (Nasdaq:ETFC), which saw an increase of 41.1% or 39.4 million shares. E*Trade Financial reported earnings on July 22, and the company had a smaller loss than expected. The stock moved higher on the day.

Another bet on disappointing earnings that investors made was on shares of Starbucks Corp (Nasdaq:SBUX), which reported on July 21. Starbucks saw a 14.7%, or 6.17 million share increase in short interest. Once again, short sellers made the wrong bet, as the company beat expectations and the stock traded higher.

Short sellers still may come out ahead during this earnings season. Applied Materials (Nasdaq:AMAT) had an increase in short interest of 15.36%, or 7.2 million shares. The company doesn't report earnings until August 11, and short sellers may take some comfort in the earnings of competitor KLA Tencor (Nasdaq:KLAC), which reported last week and missed on revenue, sending the shares down.

Biotechnology company Cell Therapeutics Inc (Nasdaq:CTIC) saw one of the largest percentage increases in short interest over the two week period, rising 120%, or 17.18 million shares. The company just raised capital through the issuance of equity and warrants, but hasn't announced an earnings release date yet. Its' first quarter earnings were released on May 7, putting it on an early August earnings release. Like all biotechnology companies, Cell Therapeutics has some drugs in the approval process, which may be the reason for the short interest increase.

One thing investors should consider is that the short interest data is two weeks old, and it is possible that some short sellers covered their shorts prior to the earnings release date once they saw how strong the upward market momentum has been this last week or so.

The Bottom Line
The largest short selling bets have not paid off during second quarter earnings season, as several companies jumped higher after reporting earnings. However, with another three weeks to go, these bearish investors may yet make money, and come out ahead. (Learn more about short interest in our article, Short Interest: What It Tells Us.)

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Tickers in this Article: ETFC, SBUX, CTIC, AMAT, AA, KLAC

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