A few weeks ago, potential sources of stock ideas were discussed on this site. The post made reference to contrarian indicators that signal that a stock is hated; this hatred can result in a low price, which value investors love. One such contrarian indicator is a stock’s short interest.
Twice a month, the exchanges release how many shares of an issue are held short (with a two-week lag). This can be a helpful resource in not only identifying which stocks Mr. Market hates, but also which same stocks Mr. Market plans to buy later. This is because when a share is shorted, it must be bought back later; as such, a high number of short shares suggests a higher than normal demand for shares in the future.
Recently, the NYSE reported that short interest was lower than it has been in about a year. This suggests that sentiment is rather positive (at least by recent standards), which should sound a bit of a warning to investors. But information like this on aggregate market data is difficult to act on. Much more interesting to bottom-up investors is the short-interest level on individual stocks.
Highshortinterest.com offers a list of the most highly shorted stocks (relative to their floats) on the major US exchanges. It currently contains about 100 of the most hated stocks in the US, and plenty of stocks with value potential litter that list. For value investors looking for potential ideas worthy of further study, this is a decent place to start.
For example, currently at #4 on the list is Conn’s Inc, which has come up a few times on this site. Further down the list are other names that have been bandied about on this site such as LodgeNet, DSW, and GameStop. Other names on the list which are currently in the news as potential value plays include Sears, Ebix, St. Joe, and Barnes and Noble.
When sentiment on a stock is extremely negative, value investors should pay attention. As such, one of the best places to look for stock ideas is the short interest list. Not only are these stocks unpopular and therefore cheap, these short shares will have to be bought back in the future.
