When the Bears Go Running: How to Turn Short-Covering Into a Contrarian Opportunity

    Investment Contrarians
    By Investment Contrarians

    Turn Short-Covering Into a Contrarian OpportunityBearish traders tend to short stocks and/or the equities market. While stocks subject to short selling are viewed as negative, I often take the contrarian view, and look at these shorted stocks as a possible buying opportunity due to the short-covering possibility.

    Let me explain. With shortselling, a trader disliking a particular stock would short the stock by borrowing the stock from his or her broker and selling it in the market at the prevailing price. The short-seller hopes the stock falls in price. For the short-selling strategy to pan out, the short stock must drop in price so that the short-seller can buy it back at a lower price and replace the borrowed position to the registered holder. The short-seller would profit.

    In my view, looking at heavy short-selling stocks is a strategy to buy a stock that could have more potential than what the short-seller thinks. By taking this contrarian short-selling approach, you can often discover stocks that may be set for a short-covering rally in which you can profit.

    For instance, online leader Google Inc. (NASDAQ/GOOG) is trading at over $800.00;however, investors continue to like the stock, as there are minimal short-selling positions on the stock at 1.6% of the float, or 1.4 million shares, as of February 15, 2013.(Source: Thomson Financial, last accessed March 14, 2013.) But note that a month earlier, there were 3.28 million short shares on Google, so the stock attracted some short-selling covering that helped to drive the stock higher, based on my stock analysis.

    I normally would not look at a stock like Google as a short-selling buying candidate due to low short interest. Stocks that have undergone a significant and rapid rally are candidates, but not always, as was the case with Google.

    Apple Inc. (NASDAQ/AAPL), which had an amazing run-up to $705.00 in September 2012, is now facing support around $400.00, yet the short interest is still light at two percent of the float.

    A prime example of a heavy short-selling stock is Groupon, Inc. (NASDAQ/GRPN), which has doubled in price from its 52-week low of $2.60 on November 12, 2012. The company’s business model of providing daily deals on goods and services is interesting, but it is not immune to the rising competition from rivals since the barriers to entry are relatively low, based on my stock analysis. Groupon faces competition from the likes of Yelp, Inc. (NYSE/YELP), Google, and Amazon.com, Inc. (NASDAQ/AMZN). Taking a look at the short interest, 31.9 million shares, or 15.4% of the float, were shorted as of February 15, 2013. (Source: Ibid.) But again, take a look at the short position a month earlier at 36.7 million shorts; this means that within one month about five million shorts were covered, which helped to drive Groupon’s share price higher.

    Blyth, Inc. (NYSE/BTH), a seller of consumer goods via direct selling and catalogs, is also a short-covering contrarian opportunity, with a major short interest of 6.5 million shares, or a whopping 63.9% of the float, shorted as of February 15, 2013. (Source: Ibid.)

    Four other candidates for short-selling contrarian opportunities include:USANA Health Sciences, Inc.(NYSE/USNA), with 60.3% of the float shorted; Vera Bradley, Inc. (NASDAQ/VRA), with 52.6% of the float shorted; Coinstar, Inc. (NASDAQ/CSTR), with 46.1% of the float shorted; and Tesla Motors, Inc. (NASDAQ/TSLA), with 56.7% of the float shorted.

    Please note: the information on the companies mentioned in this article is not to be construed as trading advice; rather, it is to be used for illustrative purposes only.

    The post When the Bears Go Running: How to Turn Short-Covering Into a Contrarian Opportunity appeared first on Investment Contrarians.

    Original: http://www.investmentcontrarians.com/stock-market/when-the-bears-go-running-how-to-turn-short-covering-into-a-contrarian-opportunity/1692/
    By: George Leong
    Posted: March 15, 2013, 7:45 am

    Investment Contrarians

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