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Since everyone loves a winner, it's reasonable to assume that everyone hates a loser -- everyone but short sellers, at least. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into potential profits.
This week, let's look at companies on the Nasdaq exchange with the biggest increases in shares short. We'll then consult the collective intelligence of MSN CAPS to see which of these companies might make short work of short sellers.
Of course, this isn't a list of stocks to buy -- or short! These stocks could have serious problems that warrant their short interest, but they might also be stricken by short-term troubles. Only due diligence will tell you for certain; our 83,000-strong CAPS community just offers a good place to start.
Most of these companies are generally well-liked. Yet Solarfun Power Holdings (SOLF, news, msgs), as the lone company on the list which has managed to enjoy a positive return over the past year, has also seen the shorts line up against it this month, with a whopping 20% of its shares sold short.
Not surprisingly, shares in the maker of photovoltaic modules used in electronics products that require solar power are down 49% year to date.
The shorts have been piling in over the past few weeks.
| Company | Industry | 12-month return | CAPS rating (out of 5) |
|---|---|---|---|
Semiconductors | -4% | **** | |
Personal computers | -19% | ** | |
Semiconductors | 15% | *** | |
Semiconductors | -45% | **** | |
Banking | -34% | *** | |
Asset management | -26% | ***** | |
Rental and leasing services | -40% | ** |
So, is Solarfun about to become fun again and rout the shorts? Perhaps not.
Part of the drag on the Chinese company's share price (aside from the general malaise of the solar-power sector) seems to be a $150 million convertible debt offering Solarfun priced at $19.13 a share in late January. At the same time, another 7.8 million shares were lent to Morgan Stanley for it to sell to bond investors to hedge their positions. Due to the nature of convertible bonds, the invitation to short the stock becomes more enticing. Let me explain.
Convertible bond holders earn interest on the bonds as long as they hold them. If the stock goes above the $19.13 price, they could convert the bonds into shares and sell them, making a profit.
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To hedge against this or against default risk, many of them short the shares -- that's where that loan of shares to Morgan Stanley comes in. Bond holders can view the shorting as a relatively risk-free hedge play.
The downside to owners of the common stock is that they bear the brunt of things both ways. If the price goes up and the bonds are converted, shareholders get diluted. Meanwhile, more shorting of the shares can occur, potentially putting downward pressure on the price in the near term.
On CAPS, top-rated All-Star "NeroSagetrade," with a 89.53 player rating, sees Solarfun's forecasted sales and its potential earnings growth as offsetting any short-term issues.
Stock Chart (Year)
Solarfun Power Holdings
Now it's your turn to have your say. Share your views with the CAPS community: Squeeze 'em till it hurts or short 'em till the sun don't shine?
May the best argument prevail.
This article was reported and written by Rich Duprey for The Motley Fool. At the time of publication, he owned shares of Intel but none of the other companies mentioned.
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