Stocks are trading at all-time highs while the number of companies with a high level of short interest is surprising, according to Bespoke Investment Group.
The firm examined February data on short sales and found 25 stocks that show a high degree of investor pessimism. A short sale happens when an investor borrows shares from a brokerage and sells them with the promise of buying them back later. The trade is profitable when the stock price drops.
“To see this many stocks with so much of their free-floating shares sold short is a bit of a surprise given the market is trading at all-time highs, but maybe the shorts know something the rest of the market doesn't,” Bespoke wrote in a Seeking Alpha post.
The 25 stocks fell by an average of 0.2 percent in February while the broader market climbed to record highs as President Donald Trump vowed to fulfill his campaign pledges to cut taxes and regulation. The S&P 500 rose 3.8 percent in February, the most in 11 months.
“Much of the weakness is confined to two stocks, as both Tidewater and Hornbeck Offshore have lost more than a third of their respective value,” Bespoke said. “On a median basis, the returns are much more respectable at a gain of 2.63 percent, but that's still more than a full percentage point behind the performance of the S&P 1500.”
The top 25 list also includes seven retailers as the industry copes with declining sales, store closures and layoffs.
“Given the pressure this group has been under, that's not a surprise,” Bespoke said. “What is surprising, though, is that some of these names like RH (formerly Restoration Hardware), Shake Shack and Big Lots are actually up on the month.”
Contrarian investors may look at the high percentage of short interest as a buying opportunity. If the stock rises, short sellers may be forced to rush in and support the price with buy orders.
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