There is nothing better than watching short sellers get burned. While short selling might have its place in the market, there is something un-American about the practice of betting against publicly traded company’s success. It’s just not our style to hope for failure, and yet plenty of short sellers are betting against stocks like Research In Motion (NASDAQ:RIMM), Netflix (NASDAQ:NFLX) and Green Mountain Coffee Roasters (NASDAQ:GMCR)
Short sellers believe these stocks are too richly priced with an expectation of smaller profits and lower revenues. And investors who short these and other stocks do so in big amounts, creating an opportunity for buyers in the event of a short squeeze.
The sheer volume of a stock sold short can be rocket fuel to the upside should the bet against failure fail. All that’s missing is the trigger.
That trigger? Earnings reports. To the extent a company that is heavily shorted reports positive news, the upside potential can be significant. It is not unusual to see heavily shorted stocks move 10% or more in one day of trading after a strong report.
Here are five heavily shorted stocks that might surprise the bears:
The airline industry has been sold heavily for most of the year, but none more so than American Airlines parent AMR Corp. (NYSE:AMR). Shares are down 64% in 2011, and helping that decline are short sellers. As of the end of September, more than 60 million shares were shorted.
The expectation is that AMR will be forced to reorganize in bankruptcy, thereby eliminating any value for common stockholders. AMR management vehemently denies that it will need protection in bankruptcy court. Despite heavy losses on an operating basis, AMR is reinvesting in its fleet by ordering new aircraft.
In the quarter being reported Wednesday, lower oil prices and an economy that still was hanging tough could push profits higher than expected. To the extent AMR can take bankruptcy off the table, shorts will run for cover. This stock could move 20% higher or more on a short squeeze.