Guess the short thesis

Here’s an interesting exercise to sharpen your investment skills: go through the most heavily shorted companies and try to figure out what the short thesis is.  Learning a little bit about what short sellers think can be very helpful as it hones your skills in detecting fraud (see my post on due diligence) and other problems at a company.

The two main measurements of how heavily shorted a stock is are:

  1. Short interest as a percent of float.
  2. The interest rate that short sellers must pay to borrow shares to short sell them.

I believe that #2 is a better indicator of the most heavily shorted stocks out there.  If short sellers are paying very high interest to short a stock (e.g. absolutely ridiculous rates such as 100%), they have extreme conviction in their short position.

I’ve made available a list of 3390 NYSE/AMEX/NASDAQ stocks with their borrow costs on my Google drive account.  The top 10 most shorted (by borrow cost) are:

  1. Suntech Power Holdings Co Ltd
  3. Dendreon Corp
  4. Sturm Ruger & Co Inc
  5. NQ Mobile Inc
  6. China Housing & Land Development Inc
  7. Kandi Technolgies Corp
  8. Galena Biopharma Inc
  9. National Bank of Greece SA
  10. Real Goods Solar Inc

Here’s my take on the top 10.  I haven’t done much research into all of these companies.

#1 – Suntech Power Holdings (STP)

This one is pretty easy: the company is about to enter the bankruptcy process.  Shareholders will probably be wiped out.

#2 – Exone (XONE)

This is a hot IPO that is taking advantage of the enthusiasm over 3-D printing.  The company has had GAAP losses over the past few years.  The valuation is absurd: the price to sales ratio is 23.08 and the price to book ratio is 9.73.

Hot IPOs tend to attract short sellers because they tend to be overpriced.  I personally feel that some short sellers irrationally target stocks simply because there is a lot of hype surrounding them.  I’m not sure if shorting hype is that great of a strategy.  Sometimes a heavily hyped company will be able to sell itself to another company, causing permanent losses for the short sellers.  This happened with Success Factors and Terremark.  I think that the short sellers have the right idea but this is not an easy way to make money.

#3 – Dendreon (DNDN)

Apparently management is heavily promotional and is being overly optimistic about its drug Provenge.  They have a past history of overpromising and underdelivering.  Insiders are selling shares heavily.

In general, development stage pharmaceutical companies tend to attract short sellers because the sector is pretty promotional and scummy.  This is not a sector where shareholders make a lot of money.

#4 – Sturm Ruger & Co (RGR)

The shorts are probably betting on a large drop in overall demand for guns.  Insiders are selling.

Another explanation is that some short sellers will target a company simply because they believe that its high returns on capital are unsustainable.  In my opinion, this is a terrible strategy.  What often happens is that wonderful companies stay wonderful and bad companies stay bad.  What you really want to do is to go long the wonderful companies and short the bad ones.

I’m actually betting against the shorts on this one.

#5 – NQ Mobile

Chinese fraud.  Muddy Waters laid out the short thesis in their excellent research reports.  They don’t seem to be selling as much of their anti-malware software as the financial statements claim.  The software isn’t that good.

#6 – China Housing & Land Development

I assume that this is being shorted because it is a Chinese fraud .  Many short sellers believe that most or almost all Chinese stocks listed on US exchanges are frauds (I agree).

Short sellers may also be targeting this stock because they want to bet on the Chinese real estate bubble exploding.

#7 – Kandi Technologies

A Chinese fraud?

#8 – Galena Biopharma (GALE)

This is a development-stage pharma company.  The sector is a short selling favorite.

Apparently Galena has paid to blatantly promote this stock, which would make this stock a pump and dump. has a good analysis of Galena’s flagship drug.  The article argues that the drug is doomed to fail.  It is highly unlikely that it will pass phase III trials.

#9 – National Bank of Greece (NBG)

A Seeking Alpha article argues Why Owning National Bank of Greece Common Stock Is An Awful Decision.  It argues that the bank is overpriced compared to its peers.

Some people may be in this stock because they are arbitraging the warrants.  The trade is to go long volatility by buying the warrants and delta hedging by shorting the common.

EDIT:  On second thought, some of the short sellers may be in this for the long debt / short common stock trade.  I don’t have good bond quotes so I don’t know.

#10 – Real Goods Solar (RSOL)

This company installs solar panels for customers.  I’m guessing that it is heavily shorted because it is losing a lot of money.  It is unlikely that the company will make money in the future given that the installation industry is mostly a commodity business with low barriers to entry.

4 thoughts on “Guess the short thesis

  1. Pingback: Sam Antar: I haven’t been impressed with him lately | Glenn Chan's Random Notes on Investing

  2. How did you find the borrow cost of 3390 securities? (Sorry if this is a foolish question; I have no experience shorting.)

  3. Pingback: Spotting frauds | Glenn Chan's Random Notes on Investing

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