Top 10 Shorted Stocks

By Joseph Nguyen | August 27, 2010 AAA

The fragile U.S. economy seems to be headed for the inevitable double dip, as a slew of recent data raise concerns about the robustness of the short-term recovery.

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The week started with the existing home sales report by the National Association of Realtors. The report showed home sales coming in at 3.83 million units in July, the lowest in a decade of records, and falling drastically short of both the forecasted 4.86 million units and previous 5.26 million units in June. Existing home sales are usually a leading indicator of the economy, and a 27% fall paints a grim picture for the rest of the year.

Durable Goods Orders Also Fell

Following on the heels of the extremely weak home sales report, the Census Bureau released the advance report on durable goods orders. Excluding transport, core durable goods orders fell 3.8% versus a forecast of +0.6% and previous +0.2%. The report indicates that manufacturers are decreasing activity, possibly anticipating weak future demand.

And not surprisingly, the August 25 report on new home sales was also weak, foreshadowed by the disappointing existing home sales report just a day earlier. New home sales came in at 276,000 versus a forecast of 333,000 and down 12.4% from the prior level of 315,000 (revised).

Heavily Shorted Stocks

At the market level, the index put-call ratio for the first four weeks of August is up over 12% over the same period in 2009, and short interest in the market has also been creeping up in the past month. With that being said, here are some of the most heavily shorted stocks recently (with average volume over 1 million):

Ticker Company Shares
Float
Float Short
NYSE: GAP Great Atlantic & Pacific Tea Co. 28.89 63.74%
Nasdaq: ATPG ATP Oil & Gas 44.76 42.69%
Nasdaq: XOMAD XOMA 21.17 40.81%
NYSE: BKS Barnes & Noble 29.64 38.82%
NYSE: HOV Hovnanian Enterprises 51.90 37.11%
NYSE: MNI McClatchy 59.67 34.22%
NYSE: ADS Alliance Data Systems 51.18 34.16%
NYSE: SKS Saks 119.32 34.01%
NYSE: MGM MGM Resorts International 251.75 33.77%
NYSE: FBP First Bancorp 78 33.12%

Data source: Finviz

The Great Atlantic & Pacific Tea Co. tops our list for the most shorted company at 63.74% of its float sold short. The company's precarious financial position appears to be the driver for the negative sentiment toward the stock. According to GAP's quarterly report for the period ended June 19, the company had negative free cash flow and a significant pile of debt - a bad combination to have should the economy head for another recession in which financing can become very scarce.

Bottom Line

The macro environment appears to suggest that investors should be extra cautious before deciding to invest in this market, as the probability of a double dip has increased with the recent weak data coming out of the U.S. Also, if you are going to invest, be sure to look at a company's short interest, as it can be a valuable tool when looking at potential investments. A high short interest will immediately signal that something may be amiss at the company that you might have overlooked. (For related reading, see Short Interest: What It Tells Us.)

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