Short Interest Stocks - Distressed Investment Opportunities
I’m a big fan of order and discipline. Most days I have my time blocked out in half hour increments in order to plan and accomplish all the tasks that I want to do on a particular day. To say that I am a creature of habit is an understatement and for the most part, my habits are carefully designed to produce results.
But occasionally, I find that stepping out of my normal routine can uncover some opportunities and new ideas that I can incorporate into a new daily or weekly schedule. So when I took a flight to Baltimore to meet with Taipan Publishing Group recently, I picked up a Barron’s and read it on the (delayed) flight from Atlanta to BWI. Now I usually have Barron’s incorporated into my weekly reading, but I get the online version and often skim through the articles and nothing more.
But as I sat in the thunderstorm on the Atlanta tarmac, I leafed through and came across the Short Interest Stocks section. This is a list of the most heavily shorted names on the NYSE, NASDAQ, and AMEX. The basic premise of this list is that investors hold these stocks in very low regard and an over-sized number of traders have sold shares short, betting on lower prices. Often, this pessimism drives stocks to an unnaturally low price that may not reflect the true economic value of the company.
When stocks are shorted en mass, it often increases volatility and can at times lead to sharp positive moves when news, sentiment, or other forces cause short sellers to cover. Essentially, short sellers are guaranteed buyers at some point in the future because they must cover their position over the long-term. If too many short sellers try to hit the exits (or buy) at the same time, there may not be enough supply of shares available for them to buy which can touch off a buying frenzy.
Now buying stocks simply because they are over-shorted is a fools game and can be very dangerous. After all, there is a reason why traders are shorting. It may be that the company has extreme debt levels, the threat of damaging litigation, or simply lower profits. But if there are stocks we are fond of with excessive short interest, the potential for huge and quick gains can make for an even more attractive investment.
When browsing through the lists, the majority of stocks were large highly capitalized names that do not make for very attractive opportunities. However there were a few that caught my eye and could turn out to be worth pursuing in the coming weeks or months.
- Las Vegas Sands (LVS:NYSE) - This is a casino and resort company that was a darling in 2007. The company used huge financial leverage to build extravagant casinos in developing provinces of China (and also holds several key properties in Las Vegas and other well known casino cities. When the economy was strong, the excessive debt was manageable because new financing was available and the expectation for future revenue kept banks happy. But as the economy collapsed, LVS fell prey to lower liquidity levels along with reduced consumer spending. The company nearly went bankrupt but was able to renegotiate some of its debt covenants. Thestock has rallied sharply off the lows but is still very depressed from its former glory levels. Short sellers are betting that debt levels will continue to be a drain, but if LVS is successful in negotiating with banks and is able to maintain control of its expansive properties, the firm could end up surviving and even thriving in the next few years.
- Amedisys Inc. (AMED: NASDAQ) - Amedisys has navigated its share of volatility as the acute home healthcare company has dealt with proposed changes to Medicare, but the company has excellent profit margins and offers much needed care that eventually saves Medicare money as patients would otherwise need expensive hospital treatment. The company has grown revenues and earnings by 40% to 80% over the past four quarters and analysts expect further increases. While growth levels may decline over the next few years, the stock is trading at a single digit multiple, and management has made several acquisitions of competitors at attractive prices over the past few months. I expect AMED to surprise the shorts and when positive news is revealed, it could be very difficult for those short to find shares to buy at attractive rates.
- NutriSystem Inc. (NTRI:NASDAQ) - In October of 2007 I issued a short recommendation on this consumer name. Readers who took advantage of this call made significant profits over the coming months as the stock dropped to an eventual low of $10.01. However, the negative news and weak retail environment now seems to be fully priced into the stock and I actually expect that higher unemployment levels may spur an independent sales force to grow and bring in significant growth over the next two quarters. NTRI has seen earnings decline, but is still making money and is expected to generate “trough” earnings of $1.21 per share this year. With the stock in the low teens, and the potential for unexpected growth in the next few quarters, short sellers could be disappointed and forced to cover.
Hopefully I will be able to make time in my normal routine to browse through the short interest reports on a regular basis. While being contrarian “just for contrarian’s sake” isn’t a viable investment policy, it sometimes pays to go against the flow.
Looking for another investment opportunity? More than 3,000 "Slush Funds" are brimming with cash... and you have the legal right to "raid" them for windfall payouts. Take advantage of the six "funds" that are ripe for picking and you could easily swipe up to $109,122. Start raiding these funds now...
Other Articles Related To This Topic:
