Short Selling As A Predictor Of Demise

By Eric Fox | February 27, 2009 AAA

Banks have suffered the brunt of selling recently, as investors question the viability of many of our largest institutions. However, investors are still betting on the demise of other financial stocks, which can be seen in the high level of short interest in certain stocks.

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The following five non-bank financials made the list of highly shorted names based on the percentage of shares outstanding that are sold short. In addition, companies that offer technology products or services to financial companies also are included on the list.

It is hard to believe that any more downside could appear for the shares of MF Global (NYSE:MF), which has 18.2% of its shares sold short. The stock of this company, which brokers futures and options, is down nearly 85% from its 52-week high. Last summer, when faced with deteriorating capital, the company raised dilutive capital and saw its shares decline 43% in one day.

Factset Research Systems (NYSE:FDS) supplies investment data and related products and services to the institutional investment community. The company had 29.2% of its shares sold short. Factset has survived the recession fairly well so far. It is down 41% from its 52-week high, as investors anticipate cuts in spending by Wall Street and other institutional customers. During its last earnings report in December 2008, the company beat estimates on the strengthening of the dollar and higher U.S. sales.

Bankrate (Nasdaq:RATE), a company that provides online rates on mortgages, credit cards, automobile loans and certificates of deposits, has 27% of its shares sold short. The stock is down 61% from its 52-week high and it just broke through an important support level, around $25 per share. The company reported an earnings decline of 34% for its most recent quarter, as display advertising weakened in the quarter. In addition, Bankrate did not give guidance in 2009. (Explore the controversies that can surround a company's forward-looking statement (or lack thereof) in Can Earnings Guidance Accurately Predict The Future?)

NorthStar Realty (NYSE:NRF) has been so trashed by the market that it would seem investors would have closed out short positions by now. The stock has 19.1% of its shares sold short and is down 75% from its 52-week high. NorthStar, a real estate investment trust (REIT), recently paid part of its dividends in stock rather than cash.

Portfolio Recovery Associates (Nasdaq:PRAA) has 31.8% of its outstanding shares sold short and has dropped 55% from the high it reached during the fall of 2008. Most would anticipate a boom in business for this accounts receivables and collections company, given the state of the economy. In fact, the company earned $2.97 per share in 2008. During the year it paid $280.3 million for receivables with a face value of $4.59 billion.

Bottom Line
Despite the huge drop in the market, investors are still making bets that some stocks have further to fall. Not surprisingly, some of these stocks are in the financial sector. Investors can use the list of the top shorted names as a starting point to do more research on these companies. (Find out how this figure can be a real eye-opener on market sentiment for a given stock in our related article Short Interest: What It Tells Us.)

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