Short selling is the act of selling a stock first and then purchasing it at a later date. The mechanism actually involves borrowing the shares to sell and then purchasing the shares at a later point in time to give back and cover the borrowed shares. This happens automatically in the current electronic age, although there are some thinly traded stocks that are hard to borrow and therefore hard to short. You must be able to borrow shares to short them. The goal of short selling is for the price of the stock to go down. It’s the same concept as buying a stock, just in reverse. If you sold short shares at $20.00 and the price declined to $15.00, you made $5.00. Shorting technically can have unlimited losses, as the price can go up to infinity; while when buying stock, you can lose only 100% of your investment, no more, as the shares can only drop to $0.
When I look at potential trading opportunities, I like to scan for stocks that have high short selling positions in them. These are the traders betting against the stock.
Now, while there’s always some validity to why a stock becomes a short selling target, it’s not always the case; this is where I see contrarian trading opportunities.
Going against the grain does work, but there have been cases where a contrarian strategy has blown up in my face. The key here, like any other situation, is to make sure you have an exit strategy. So while some traders view heavy short selling positions as a negative, I view extreme short selling as a possible trade opportunity to make money by betting against the herd.
An excellent example of this is the case with Tesla Motors, Inc. (NASDAQ/TSLA), which saw 62.9% of its float shorted in mid-April, when the stock was trading at the $46.00 level. In my view, the amount of short selling was extreme and worthy of a look for the aggressive trader. The company subsequently reported some numbers and its outlook—all excellent.
The result was a significant pop in the share price of Tesla from investors buying and short-sellers covering. The stock surged 147% in about six weeks, with the shorts falling to 36.9% of the float as of May 15, according to data on Yahoo! Finance. A call option trade on Tesla would have yielded even greater returns due to the leverage used.
Take a look at the chart of Tesla below, and note the two major opening upside gaps as indicated by the purple circles, based … Read More
In my view, Google Inc. (NASDAQ/GOOG) is tops in the Internet space, and a better play than Facebook, Inc. (NASDAQ/FB) and Yahoo! Inc. (NASDAQ/YHOO), based on my stock analysis. (Read “Facebook’s Hot, But Valuation’s Questionable.”)
At just over $700.00 a share, you may think the stock is expensive. On an absolute basis, a $700.00-plus stock is not cheap, but on a valuation and comparative basis, Google is still tops, according to my stock analysis.
My stock analysis suggests that Google will continue to dominate and gain market share in the Internet space with its “Android”-powered “Nexus” smartphones and Wi-Fi Internet offering.
Wall Street is optimistic about the investment opportunity of Google. Let’s first take a look at what analysts are expecting. Of the 39 analysts polled by Thomson Financial, 11 rate Google a “Strong Buy,” while 20 analysts rate it a “Buy” and eight rate it a “Hold.”
The most bullish analyst among the group has a one-year price target of $900.00 on Google, versus the mean target of $799.32.
And in spite of its higher stock price, my stock analysis shows that Google continues to attract institutional buying, unlike many of the other major technology companies.
Institutional investors purchased 220,152 shares over the past quarter-to-quarter, which represents almost a 0.1% rise in institutional ownership, based on information from Thomson Financial. By comparison, institutional investors have sold 4.8 million shares of Apple over the same period.
Short selling is also relatively absent with a mere 17.9 million shares short, or about 1.9% of the float, as of December 31, 2012, according to Thomson Financial.
If you are eyeing … Read More
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