These Heavily Shorted Stocks May Break Higher

Blurry stocksBy Sean Williams, The Motley Fool

Usually stocks that have a high percentage of shares held by short-sellers are a red flag. Though high short ratios are not a foolproof method of determining whether or not a stock is worth avoiding, they've served as the warning sign of a poor investment more often than not.


Short Interest as % of Float

China MediaExpress Holdings (CCME)


Meru Networks (MERU)


Conn's (CONN)


Source: The Wall Street Journal

Shares of China MediaExpress have been halted for nearly a month now following allegations that the company misstated its revenue and earnings figures. Conn's reported fourth-quarter results last week which badly missed the mark and have the electronics retailer's stock down almost 30% over the past year. Likewise, Meru Networks shares have lost nearly one-quarter of their value in the past week after the wireless products and services provider significantly lowered its first-quarter guidance.

The lesson is that high-short ratios often tell us a convincing story -- but not in all cases. In fact, there are three companies which could bite shorts in the bottom if they aren't careful.


Short Interest as % of Float

Bridgepoint Education (BPI)


ATP Oil & Gas (ATPG)


SunPower (SPWRA)


Source: The Wall Street Journal

Bridgepoint Education garners one of the highest short ratios in the entire market, but a quick glance at its balance sheet has me wondering why. As fellow Fool Andy Louis-Charles points out, Bridgepoint has expanded its student enrollment while also significantly padding its margins -- all while the entire education sector comes under heavy scrutiny by the Congress and the Department of Education. Short-sellers may have incorrectly bet against the wrong horse in this sector.

ATP Oil & Gas had its short interest spike through the roof during the BP oil crisis one year ago, which put a six-month moratorium on all deepwater drilling. Now clear of that crisis and with deepwater permits carefully being reassigned, prospects for ATP are looking up. Personally I like ATP for its undervalued natural gas reserves, but it's ATP's potential oil fields that have most investors excited. If ATP does manage to strike it big in the Gulf of Mexico or off the coast of Israel, short-sellers could really be in a bind.

SunPower, a company that designs and sells solar electric panels -- and is a favorite of our socially responsible investing Fool Alyce Lomax -- simply appears too inexpensive to have attracted such a high short concentration. Short-sellers were lured by a potential slowdown in business from Germany, but based on SunPower's most recent quarterly filing, they've been wrong to focus solely on Europe. Business in the U.S., as well as the potential need for substantially higher solar outputs in Asia helped move the company well past consensus estimates. Short-sellers may want to re-think their position in SunPower.

It remains to be seen if these three companies can squeeze shorts out of their positions. But based on their balance sheets and growth prospects, if I were short these three, I'd be shaking in my boots.

What's your take on the companies mentioned here? Are you buying into these heavily shorted companies? Share your thoughts in the comments section below and consider adding these stocks and your own personalized list of companies to My Watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He would like to remind you not to forget about our friends in Japan who could use a helping hand. You can follow him on CAPS under the screen name TMFUltraLong. Motley Fool Options has recommended a call spread position on Bridgepoint Education, of which the Fool owns shares. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never needs to be sold short.

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May 29 2011 at 12:16 AM Report abuse rate up rate down Reply

If your a small investor then the only thing you should be investing in is commoditys including silver. Commoditys will have a steady raise from this day on to who knows when, im thinking a couple years yet, this world is going to hit a all time disaster flow of events that will push commoditys and keep them up for next few years, from copper,silver,corn,beans,nickle,coffie, you name it it will start a steady streak UP. People should start to look at some of these silver mine stocks if they can,t or don,t want to handle bars, or coins, other metal minning stocks should be looked at also. The whole world will be going into a rebuilding stage real soon and those that are holding commoditys will come out on top. Buy them and sit on them they will pay out, in the metals market EVERYTHING is going up and will stay that way for a nice long time, even scrap prices are going threw the roof .. you can tell when metals will go to a good high when in some states Alumiun cans are selling for 74 cents a lb., that night not say much to most but to a metals people it speaks volumns for what is in store for commoditys.

April 11 2011 at 12:36 AM Report abuse rate up rate down Reply

Audit the Fed

April 10 2011 at 5:26 PM Report abuse +1 rate up rate down Reply

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April 10 2011 at 10:21 AM Report abuse rate up rate down Reply
1 reply to rgnaswdxr's comment

Is it made in China??? American made only??? Where's the items made rgna? India? Pakistan? this is a BUY AMERICAN advertisement.

April 10 2011 at 11:02 AM Report abuse rate up rate down Reply

Investors should also realize shorting is no different than a para mutual bet at a race track this is an opinion held by someone and there will always be others betting or in this case investing taking the opposite position. You might feel more comfortable if their were people actually laying odds on the likelihood of an outcome.

April 10 2011 at 9:43 AM Report abuse rate up rate down Reply

Wonder how much money the budget would get cut if WE cut all federal salaries, Senators, Congressmen, Supreme Court Judges, The President, and all their staffs a healthy ten percent? Have you heard of any pay cuts in any of those areas???? Hmmmmmmmm?

April 09 2011 at 11:16 PM Report abuse +1 rate up rate down Reply
1 reply to HoustonCity77036's comment

Right on.

April 10 2011 at 10:15 AM Report abuse +1 rate up rate down Reply

Where's that balanced budget amendment??? It's that simple.
Anybody in the mood for that elusive " line item " veto power?
The formation of a third political ( working man's ) party should be
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April 09 2011 at 4:31 PM Report abuse +3 rate up rate down Reply

Maybe a good president like bush could suggest some ways to save money such as going into Iraq and spending billions upon billions of dollars and thousands of lives to find non-existent weapons of mass destruction. Hmm...shut off engine of air force one. Nice bigot

April 09 2011 at 10:19 AM Report abuse -7 rate up rate down Reply
1 reply to cpanz7's comment

Hmmm...seems the current "president" is making the same mistake as Bush by spending billions to help even more radical Muslims who will never appreciate America's sacrifices to remove a tyrant from power. America must stop trying to "police" the world. We can no longer afford the expense in terms of lives destroyed and trillions of dollars wasted for nothing. Protect America's borders and freedoms first!

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To avoid a government shut down, maybe Michelle should reduce her staff of servants. She only has 21 at her disposal and the Muslim dictator should let the engines cool off on Air Force One.

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