Virtually every stock of any real size is going to have a certain amount of short interest. When a stock's short interest reaches double-digits, though, investors should pay a little attention. By and large, retail investors do not short stocks and neither do most mutual funds. Moreover, the rules and hassles of short selling combined with the theoretically unlimited loss potential often mean that short positions are not entered into lightly.
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While some short positions are simply a byproduct of a fund manager's belief that a stock is simply overvalued, often it is a bet on the notion that there is something more fundamentally wrong with the basic business. Accordingly, it is interesting to see that there are a number of stocks with high short interests trading near their 52-week highs. Is this simply a product of a bull market that has gone on too long, or is there something worse lurking beneath the surface? (For more, see Stocks With Increasing Short Interest.)
|Name||Shares Short (%)||Price as % of 52-week High||52-Week Price Performance||P/E|
|Alliance Data Systems (NYSE:ADS)||37%||97%||21%||23|
|World Acceptance (Nasdaq:WRLD)||34%||95%||49%||11.5|
|Jos. A Bank (Nasdaq:JOSB)||23%||97%||44%||16.2|
|Ann Taylor (NYSE:ANN)||24%||98%||36%||22.4|
|Titan International (NYSE:TWI)||22%||96%||158%||N/A|
|Bank of the Ozarks (Nasdaq:OZRK)||22%||95%||28%||11.4|
|Texas Capital Bancshares (Nasdaq:TCBI)||15%||95%||33%||24.8|
|C.R. Bard (NYSE:BCR)||12%||96%||14%||17.9|
Bits and Pieces
Titan International (NYSE:TWI) may be a case of "too much, too soon". This supplier of heavy-duty tires used in off-road applications like farming, construction and mining has clearly enjoyed a good run on the back of the "stuff trade". Unfortunately, this company has never been notably good at producing healthy returns on capital or large amounts of free cash flow. Now that the materials trade seems to have hit the pause button, there is a risk that momentum could shift quickly.
C.R. Bard (NYSE:BCR) is a surprising name to see on this list, given its long and well-established reputation as a conservative (if not boring) healthcare company with solid markets. Bard doesn't leap off the page as especially expensive. Perhaps shorts believe the company's peripheral vascular business is vulnerable to competition from Covidien (NYSE:COV), Cook and/or Cardiovascular Systems (Nasdaq:CSII), or that the company's fortress urology business is more vulnerable than commonly believed.
The high short interest in Bank of the Ozarks (Nasdaq:OZRK) and Texas Capital Bancshares (Nasdaq:TCBI) could be another case of investor expectations getting ahead of likely financial performance. Bank of the Ozarks is quite expensive on a relative basis (on a price/book basis, not on price/earnings), but this is a company that has steered through the rapids of the credit crisis and recession better than most, and has taken advantage of the distress of other banks by buying them on the cheap.
On the other hand, Texas Capital has seen more credit issues than Bank of the Ozarks, but benefits from being arguably one of the most attractive acquisition targets in the Texas banking market. In either case, investors in either bank may come up against the fact that loan growth is not strong right now and interest rate conditions may constrain growth in the short term. Both banks look like solid long-term performers, but both could underperform peers as a lot of good news is already baked into the shares.
The Bottom Line
A high short interest is no reason to sell in and of itself. After all, success in the market is predicated at least in part with matching wits and viewpoints with the market at large and having the confidence that your view is the correct view. Still, the "professional shorts" do more due diligence than many investors realize, and their willingness to swim against the tide and bet on share price declines should not be ignored. Clearly these stocks have enough popularity and support to be near 52-week highs, but investors should at least consider the downside risks and protect themselves accordingly. (For more, see Short Interest: What It Tells Us.)
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