Stocks with heavy short interest are really interesting from an investment standpoint.
At one end, a heavily shorted stock represents a stock that many people are betting against, meaning that there is probably a strong thesis out there that the stock will head lower. But, at the other end, a heavily shorted stock also represents a stock where there’s a ton of money betting on the stock going down, meaning that if things improve at the company, the stock could be set for a big pop from a short squeeze as shorts rush to cover.
Thus, going long a heavily shorted stock is often a high-risk, high-reward scenario. Either the consensus bear thesis is right, and the stock falls (which is likely). Or, the consensus bear thesis is wrong, and the stock pops (which is unlikely).
Heavily Shorted Stocks to Watch: Gogo (GOGO)
One of the most heavily shorted stocks in the market is Gogo (NASDAQ:GOGO), with a short interest (percent of the float that is short) of nearly 80%.
The company provides broadband connectivity services for airplanes. This was a hot space a few years back when in-flight Wifi was supposed to be the next big thing. It did turn into the next big thing, and Wifi for airplanes is the standard now. But, the costs of providing that Wifi are huge, and Gogo’s revenues haven’t been big enough to offset those costs.
Bears are betting this company never nets a profit, and the stock keeps tumbling. They might be right.
But, while the company is still losing money, net losses are narrowing. If this company can turn into even a slightly profitable operation, then GOGO stock could fly.
Heavily Shorted Stocks to Watch: CARBO Ceramics (CRR)
With a short interest of 70%, Carbo Ceramics (NYSE:CRR) is one of the most heavily shorted stocks in the market.
Carbo is an oil and gas services company. Naturally, higher oil prices are supposed to push up demand for Carbo’s services, specifically for the company’s ceramic proppants. That is happening. But, at a slower than expected rate. Thus, the reality seems to be that ceramics are losing share to cheaper sand proppants. These market share losses diminish the long-term growth outlook for CRR.
Bears are betting that cheap sand proppants are winning out. It certainly does seem like that is the case, with revenue growth lagging consensus estimates. As such, CRR stock looks like it could be in for a bumpy ride.
Heavily Shorted Stocks to Watch: Turtle Beach (HEAR)
Headphone-maker Turtle Beach (NASDAQ:HEAR) is also one of the most heavily shorted stocks in the market with a 70%-plus short interest.
Turtle Beach makes the gaming headsets which have become the hottest consumer product in the gaming world as battle royale, communication-focused games like Fortnite have become the trend. As a result, Turtle Beach has been selling a ton of headsets in 2018.
Bears are betting on this trend ending soon, and Turtle Beach’s Fortnite bump disappearing. That could happen. But, more likely, battle royale remains the market’s favorite gaming category, and Turtle Beach continues to sell a ton of headsets.
In that scenario, HEAR stock could head even higher (it is already up 1,200% this year).
Heavily Shorted Stocks to Watch: Applied Optoelectronics (AAOI)
Not far behind Gogo and Carbo in terms of short interest is Applied Optoelectronics (NASDAQ:AAOI), with a short interest of over 55%.
Applied Optoelectronics provides fiber optic equipment for data-centers. This used to be a big growth industry, and AAOI used to count the biggest cloud players as its customers.
But, some big cloud players have ditched AAOI, and are either going elsewhere or building out their own equipment. This customer churn has caused AAOI stock to drop like a rock.
Shorts are betting this tumble will continue as more cloud giants leave AAOI. The company is making solid progress in the 100G category, however, and continues to score Big Data-center wins. So long as AAOI keeps up this momentum, shorts may rush to cover, and AAOI stock could pop.
Heavily Shorted Stocks to Watch: Lannet Company (LCI)
Another stock with short interest above 55% is Lannet Company (NYSE:LCI).
Lannet develops, manufactures, and distributes generic pharmaceutical products. LCI stock recently fell from ~$15 to ~$5 overnight on news that the company’s contract with a big supplier (Jerome Stevens Pharmaceuticals) wouldn’t be renewed, and that Lannet would essentially lose all of its Jerome Stevens business.
That is no good. It is estimated that Jerome Stevens was the biggest driver for roughly half of Lannet’s revenues. Thus, this is a big chunk of the business that is gone.
Until that chunk is replaced, shorts will likely be right on this name as sales and profits fall into hugely depressed territory.
Heavily Shorted Stocks to Watch: MiMedx Group (MDXG)
Biopharmaceutical company MidMedx Group (NASDAQ:MDXG) is yet another heavily shorted stock with 50%-plus short interest.
This company used to be a biotech star. Earlier this year, it traded as high as $18 as the company dazzled investors with spectacular growth numbers from its tissue-repair business. But, those numbers were misleading.
It looks like, among other things, MDXG overstated their financials over the past several years, and now the whole executive suite has been shaken up, the company is restating its numbers, and everything is a mess.
Shorts are betting that the lack of clarity surrounding the MDXG situation will keep shares depressed. That is a good bet. So long as this situation remains messy, MDXG stock remains an investment nightmare.
If clarity arises, then a buying opportunity may emerge. But, until then, this stock should remain weak.
Heavily Shorted Stocks to Watch: Match (MTCH)
Staying in the 50%-plus short interest group, we have technology company Match (NASDAQ:MTCH).
Match is the parent company behind multiple online dating apps, including the ultra-popular Tinder. Tinder has been on fire lately, and that has powered MTCH stock to new highs. The stock is up 150% over the past year.
But, big competition is looming, and shorts are betting that big competition from Facebook (NASDAQ:FB) will ultimately kill this bull rally. I’m not so sure that Facebook will outright dominate Tinder in the online dating world.
The emergence of Facebook dating will have a big enough effect to compress what has become a very big valuation on MTCH stock. As such, I think the bears are right here, and the bull run in MTCH stock is nearing a close.
Heavily Shorted Stocks to Watch: J.C. Penney (JCP)
The first big retail stock on this list is JCPenney (NYSE:JCP), the troubled department store with a short interest of right around 50%.
Retail has been killed over the past several years. But, over the past few quarters, most retailers have staged a big comeback as brick-and-mortar retail has stabilized and traditional retailers have upped their e-commerce games. By and large, retail stocks have been in rally mode.
Except for JCP. This company can’t seem to shake sluggish comparable sales growth trends, while any and all growth is being driven by deep discounting, which is killing margins. Meanwhile, the company is sitting on a mountain of debt, which is hard to ignore when the company isn’t making any money.
The writing on the wall looks clear for this distressed retailer. Traditional retail is shrinking, and there isn’t any space for old JCP. Pretty soon, this company will likely be extinct.
Heavily Shorted Stocks to Watch: PolarityTE (COOL)
Moving out of the 50%-plus short interest group, we have PolarityTE (NASDAQ:COOL), with a short interest of over 45%.
PolarityTE is a biotech company which focuses on regenerative medicine. It has been the subject of intense debate recently after notorious short-seller Citron Research targeted the company at the end of June, calling it “MiMedx with no sales” and accusing the company of fraud in raising money based on an illegitimate patent application that was rejected.
COOL stock dropped big on the news, but has since rebounded on a positive update regarding the company’s first product, SkinTE, which is now one month into commercialization. Bears think that doesn’t matter because of the fraud Citron pointed out. Bulls think the fraud claims are irrelevant, and that this company is on the verge of something huge.
At this point in time, it is tough to say who is right. But, it is easy to see that risk is high, and that this stock should be avoided for risk-adverse investors.
Heavily Shorted Stocks to Watch: Intrexon (XON)
As if there weren’t enough biotech stocks on this list already, let me introduce you to Intrexon (NYSE:XON), another heavily shorted biotech stock with a 45%-plus short interest.
Intrexon is a life and health biotech company that seems to be facing the same headwinds as its peers on this list. Namely, the company is delaying the filing of its second-quarter report to the SEC, and saying it will have to restate its first-quarter numbers, as the company overstated revenue.
These aren’t good signs, especially considering what has happened to other biotech companies that have done the same thing. As such, XON stock lacks enough clarity to outright dismiss the bear thesis. Until more clarity arises, this is a stock that investors should avoid.
Heavily Shorted Stocks to Watch: Achaogen (AKAO)
Yet another biotech stock with 45%-plus short interest is Achaogen (NASDAQ:AKAO).
The bear thesis on Achaogen is pretty simple. This company’s holy grail is Zemdri, an antibiotic used to treat adults with complicated urinary tract and bloodstream infections. Zemdri was recently approved by the FDA for urinary tract infections, but not for bloodstream infections.
AKAO stock plummeted on that news. Since, Achaogen has restructured its operations, announced big executive departures, and said it will raise capital to support commercialization of Zemdri.
In other words, there is a lot riding on the success of Zemdri. If the treatment is a massive hit, AKAO stock could blow shorts out of the water. It doesn’t live up to expectations, this stock could drop like a rock.
Heavily Shorted Stocks to Watch: Overstock.com (OSTK)
Finally, we get out first blockchain stock on this list with Overstock.com (NASDAQ:OSTK), a stock with a short interest of over 45%.
Overstock.com has taken many shapes and forms over the course of its life as a publicly traded company. Most famously, it was an e-commerce operation. Most recently, it has turned into a blockchain company with all sorts of investments across the entire blockchain universe.
Naturally, as bitcoin prices have fallen and blockchain hype has died, OSTK stock has dropped. In January, this was an $85 stock. Today, it trades under $30.
The path forward for Overstock as a diversified blockchain company is exceedingly unclear. Until clarity arises as to what this company will actually look like in twelve months or five years, investors will continue to avoid it and shorts will continue to be right.
Heavily Shorted Stocks to Watch: Spark Energy (SPKE)
Utility stocks have done pretty well despite a rising 10-Year Treasury Yield, but that hasn’t stopped shorts from piling it on when it comes to Spark Energy (NASDAQ:SPKE), an independent energy services company with more than 45% short interest.
This business, and the stock, has gone in cycles over the past several years. The current cycle has SPKE stock trading at its lowest levels since 2015. Shorts are pretty much betting that this company goes out of business, as its energy business fails to add customers, profits fail to come back, and the debt burdens the company financially.
I’m not so sure that will happen. SPKE is rapidly extending its footprint, and with such a low penetration rate, this company does have a long runway for potential growth ahead. The stock already seems beaten up, and tends to bounce when it gets this low. Thus, risk-reward actually looks favorable to the upside.
Heavily Shorted Stocks to Watch: GameStop (GME)
The video game world is rapidly changing, and investors are betting that this change could force GameStop (NASDAQ:GME) to close its doors.
GME stock has a greater than 45% short interest, and that isn’t terribly surprising. After all, this company certainly feels a lot like Blockbuster. Video games aren’t being bought in store anymore. They are being bought and delivered digitally. Plus, once cloud gaming comes along, console purchases won’t be a thing anymore, either. Thus, the need to go to a Gamestop will only grow smaller and smaller over time.
This consensus thesis feels about right to me. I used to think GameStop had a future as a video game hardware retailer. But, technology is progressing towards an era of cloud gaming where consoles are obsolete. In that world, GameStop is obsolete, too.
Heavily Shorted Stocks To Watch: Switch (SWCH)
Last, but not least, is co-location data-center company Switch (NYSE:SWCH), with a short interest of almost 40%.
Switch went public at $17 a share in October 2017. SWCH stock briefly rose above $20 in its first few days of trading. But, it has been nothing but down since then as growth has dramatically slowed due to fierce competition in this market.
Meanwhile, SWCH stock still trades at nearly 6X trailing sales, is growing sales at a sub-20% rate, and is only marginally profitable. That isn’t a healthy combination. As such, SWCH stock could fall more as valuation normalizes to match slowing growth.
As of this writing, Luke Lango was long HEAR and FB.