As share prices broadly rise, some investors are betting big against the three stocks listed below.
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Each has seen heavy "short-selling" in recent weeks. That's a trading tactic that involves selling shares without actually owning them in hopes of buying them later at a lower price and pocketing the difference. Whereas most stock investors try to buy low and sell high, short-sellers seek to sell high and then buy low.
The strategy is risky; stocks can only fall to zero but there's no limit to how much they can rise, so an unlucky short-seller can lose much more than the initial cost of his bet. For that reason, investors who short stocks are often experienced, confident and deep-pocketed (or else reckless).
That means that a rise in short-selling activity for a stock is generally a negative sign. Of course, on Wall Street, extreme levels of pessimism are sometimes taken as a positive sign. The worst is already priced in, the thinking goes. And heavily shorted stocks can have added appeal to contrarian investors, because of all that "short interest", or shares that must be bought back in the future.
But investors should have strong reason to believe that short-sellers are wrong on the following stocks before buying them. Without such a reason, view this as a list of stocks to avoid for now. Each stock has seen more than a 10% increase in short interest over the past month, to the point where short interest is now more than 10% of the stock's "float", or shares available for trading. Also, each stock has a short interest equal to more than 10 days' worth of average trading volume.
Best Buy- Short interest as percentage of float: 17%
Best Buy (BBY) shares peaked more or less with the real estate bubble in mid-2006. Since then, the company has lost half its value. Last week, Best Buy reported a fiscal fourth quarter loss on restructuring charges and issued revenue guidance that fell below Wall Street's expectations. Management says it will close 50 big box stores to cut costs and replace them with twice as many smaller ones. Rival Circuit City went out of business in 2009. Unlike that chain at the time, Best Buy carries only moderate debt.
Barnes & Noble- Short interest as percentage of float: 72%
Barnes & Noble (BKS) put itself up for sale in 2010 but secured only a preferred stock investment, from Liberty Media. The company has bet heavily on its e-reader, the Nook, but in January cut its sales forecast for the device. The liquidation last year of rival book chain Borders gave Barnes & Nobles stores a sales boost last quarter. The company, however, isn't expected to turn a profit this year or next. Last year it eliminated its dividend payment.
Peet's Coffee & Tea- Short interest as percentage of float: 21%
Peet's Coffee & Tea (PEET) is debt-free with rising sales and profits. What's not to like? Shares sell for more than 40 times this year's earnings forecast, making them nearly three times as expensive as the broad U.S. stock market. Plunging prices for raw coffee beans have given roasters and coffee chains a profit boost. (Whereas drivers are quick to expect savings at the pump when crude oil prices drop, coffee drinkers don't necessarily look for cheaper lattes when bean prices fall.) And a looming patent expiration for Green Mountain Coffee Roasters (GMCR) could give companies like Peet's a cut of the lucrative trade in K-cup coffee pods. Despite these things, short-sellers may simply view the stock's price as over-caffeinated.
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