The Most Heavily Shorted Stocks on the Market

It takes ample courage to bet against stocks when they’re rising.

Indeed, many investors that seek out stocks to short have been moving to the sidelines throughout the late 2010 rally. Yet with stocks now notably more pricey than they were last summer, the temptation to start betting that the next move will be down — at least for selected names — hasn’t been this tempting for several years. Even if you’re not prepared to short stocks yourself, you need to pay attention to the short interest data, as it may clue you in to some companies or industries that you hold in your portfolio. If the shorts disagree with your bullish view, you’ll need to dig in and find out why.

Short-sellers often focus on stocks that have surged much higher in a short time, which was the basis of my look at these three stocks last month.

Yet other companies are even more squarely in focus for short-sellers. Let’s look at some heavily-shorted stocks, each of which is makes the “short list” grade by a distinct measure. The stocks noted in the table below don’t lead the lists in terms of specific categories, but they are among the leaders.

A few of these stocks hold obvious appeal to short-sellers. For example, Barnes & Noble (NYSE: BKS) has put itself up for sale, with few takers. Last summer, I suggested that few potential buyers would find the company’s massive store base to hold appeal, especially since stores are generating less business than before. Five months later, that still looks to be the case.

Shares of many for-profit education stocks are being shorted right now, as investors become increasingly convinced that these companies are now in a negative revenue spiral while fewer students gain access to student loans. Bridgepoint Education (NYSE: BPI) is the most heavily-shorted stock in the group. Less than two-thirds of its students make it past the first year.

Investors are also growing increasingly concerned about China’s economy, with some predicting a stumble in 2011. For China-based hoteliers like Seven Days (NYSE: SVN), which has seen its stock double in the last six months, short sellers think that projections for 35% sales growth in 2011 appear to be too aggressive, and they’re betting that shares will be hit by profit-taking once growth cools.

Boston Scientific (NYSE: BSX) — a heavy spike in recent short interest
This cat surely has nine lives. In the last few years, Boston Scientific has seen steady turnover in its management team, been in court multiple times for patent infringement hearings, been the subject of several Department of Justice investigations, had to conduct a massive recall of its defibrillators in 2010, racked up $5 billion in litigation charges in the past five years and hasn’t turned a profit since 2005.

Despite that tale of woe, optimistic investors started snapping up shares in recent months, pushing the stock up nearly 50% since Labor Day. Yet this is still a very troubled company, carrying about $5 billion in debt. To boost growth, Boston Scientific is making acquisitions to bring fresh growth opportunities. Yet some of those deals, such as the one for a heart-valve business, merely represent second-tier offerings in crowded fields.

At a November 2010 meeting with analysts, management ran through a series of steps that intend to boost profits 10% annually, highlighted by cost cuts. But most analysts scoffed at management’s targets. Goldman Sachs doubts that cost-cutting will lead the company out of its morass: “Given our below consensus revenue estimates for the foreseeable future, we believe these cost controls will essentially be an offset for lower-than-expected revenue growth rather than incremental growth opportunities.” They predict shares will fall back to $6, nearly 20% below current levels.

Citigroup put the outlook in even harsher terms: “BSX currently has 75% of sales in markets that are collectively declining and are expected to be flat over the next three years….(and) a thin pipeline and cost cutting plans don’t mesh with a viable plan to grow sales.”

Molycorp (NYSE: MCP) — a quarter of the share count is held short
This rare earth miner has been scorching: the July 2010 IPO has seen its stock rise from $12.85 to a recent $51 thanks to a decision by China to sharply curtail exports of rare earth minerals that go into a range of electronics and industrial applications.

That move led to a sharp spike in price for rare earth minerals, a real boon for Molycorp, which is set to start digging up mines in Colorado and California. Yet the sharp spike has also led many other mining firms to look into the opportunity as well, and analysts expect to hear about other new mining ventures across the globe during the course of 2011. (Indeed the word “rare” is a misnomer. These minerals are abundant, but were not economically feasible to mine at very low prices.)

To close the output gap from China’s pullback, Australia’s Lynas Corp. expects to ramp up output later in 2011, a full year before Molycorp’s planned start of production. Other rivals are expected to start producing rare earth minerals a year or two after Molycorp begins production.

So why are short-sellers piling on right now? Because they note that Molycorp insiders will be free to start selling shares on January 25 when the six-month post-IPO lock-up period expires. What are shares fundamentally worth? Share sellers likely don’t have an actual target in mind. But they note that the company’s $4 billion market value likely overstates the potential cash flow the company will squeeze out of its mines in coming years. 

Action to Take –> The interesting part of this whole analysis is that each of these stocks may be ripe for a pullback for their own intrinsic reasons. So if you’re looking for a clear short case, these stocks may be where you can profit. Investors aren’t making big negative bets on the economy with these stocks, but are instead focusing on companies that have received too much hype or are getting in front of specific events that will trigger a pullback.

We’ve just identified six surprising events that could break your portfolio wide open in 2011. Knowing these pivot points in advance lets you focus your investing strategy like a beam of light in the dark… and make a lot of money in a hurry. Get them free by simply watching this video presentation.