Is High Short Interest a Risk or an Opportunity?

Foodles recently asked a very good question…
What’s the highest short percentage anyone’s heard of on a stock?

I started this board 17 months ago and early on said I avoid high shorted stocks because they are usually insiders/market makers that know more than the public which makes them a risk. However, when they get it wrong it becomes a large opportunity.

Nov 11th: Nvidia went up 30% in one day based on a blowout quarter and an article said it was a short squeeze. NVDA only had 13% of float shorted. 14 trading days later it remains at the peak level of that first day.
Nov 15th: DRYS share price went up from $5 to a peak of $102 1940% in 4 days and then in the following 5 days retuned to the $5’s. DRYS only had 13% of float shorted too.

This is the very definition of a short squeeze:
a rapid increase in the price of a stock that occurs when there is a lack of supply and an excess of demand for the stock. Short squeezes result when short sellers cover their positions on a stock, resulting in buying volume that drives the stock price up. They have to do this because the risk of shorting a stock is infinite (the price can always go higher), but the risk of owning (long) a stock is only the value of the stock you own (the price can only go to zero).

Float is…
the number of shares that are actually available for trading when you subtract restricted shares from the shares outstanding.

Now Nvidia has a market cap of ~$47B with 514M shares floated and Dry Ships has a market cap of only ~$5.3M with only 1.0M shares floated. So of course the squeeze is going to have a larger effect on a micro cap vs a large cap company. By the way, Bofi Holding has a market cap of ~$1.5B with 23M shares floated. Which is ony 3% to 4% of the size/amount of Nvidia!

So to answer Foodles’ question…
There are only 5 more shorted stocks (as a % of float) on Nasdaq than BOFI which is at 42.5%:
INSY – 75%, EGLT - 55.7%, TREE- 52.5%, CZR – 52.3%, JAKK - 43.5%
http://www.wsj.com/mdc/public/page/2_3062-nasdaqshort-highli…
There is only 1 more shorted on the NYSE Market:
STRP 45.3%
http://www.wsj.com/mdc/public/page/2_3062-amexshort-highlite…
And only 5 more shorted on the NYSE:
RES – 53.1%, EPE – 48.9%, ATW – 43.2%, CRC – 42.6%, PSTG - 42.5%
http://www.wsj.com/mdc/public/page/2_3062-nyseshort-highlite…

For those who also didn’t even know there was a NYSE and a separate NYSE MKT. I looked it up. NYSE Mkt is currently marketing itself as the market for small cap companies. It was the former American Stock Exchange AMEX till 2008, when it became NYSE Alternext U.S. till 2009, when it became NYSE Amex Equities till 2012, when it became NYSE MKT. Gee – I wonder why I didn’t know.

So Insys Therapeutics, Inc. is the most shorted stock in the world and Bofi Holding is the 11th.

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So Insys Therapeutics, Inc. is the most shorted stock in the world and Bofi Holding is the 11th.

F1Fun,

That was quite an interesting post. I honestly don’t know what to think of it. While I don’t know many of the tickers you listed, I see CZR (Ceaser’s Entertainment) who is going through bankruptcy proceedings. Seems plausible they’d have a high short interest.

I’ve held BOFI for some time and added to it in the teens. My faith may be sorely misplaced, but they continue to operate extraordinarily well. I just don’t see the risk with BOFI and don’t understand the severely high short interest. That is bullish to me, but certainly gives me pause all the same.

At some point, something has to give doesn’t it? This is almost a binary bet given the high short interest.

Very interesting indeed…

A.J.

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I just don’t see the risk with BOFI and don’t understand the severely high short interest.

A.J. - I think you pointed out the risk in your post. This is almost a binary bet given the high short interest. It is going to decisive jump one way or the other some day.

As for the second part of not understanding. I believe the short interest is made up of two camps. Those who think BOFI is a scam and is doomed to crash; (These people are purely short and have no long positions)and those who think BOFI is probably a good company but have hedged their long positions with short ones. I think the latter is most likely the larger share of the two given that 89.99% of the shares are held by institutions.

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F1Fun,

Yes, it is almost binary and that is the big risk. However, it seems the downside is much less than the potential upside.

I’m not an attorney and don’t know the law at all. However, the court cases “appear” to be without merit. The pension fund is suing for the stock tanking which was caused by short sellers spreading fear.

Each successive attack has had a diminishing effect on the stock price. I have a decent size “bet” on this binary outcome, but know that I could be completely wrong.

Based on some of the short squeezes your original post highlighted, I cannot imagine what would happen to BOFI if positive news is released.

Lastly, thanks for pointing out the role institutions are playing in the short interest.

Take care,
A.J.

As a side note, Porsche’s takeover of Volkswagen resulted in one of the best short squeezes I ever witnessed. Only ~13% of the shares of Volkswagen were sold short but the short squeeze that occurred from Porsche’s takeover resulted in Volkswagen’s share price increasing almost five fold in a matter or days.

https://www.quora.com/What-are-some-of-the-greatest-short-sq…

Wiseguy

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And here I had thought that Porsche was part of VW. Now I’m wondering if Audi is only partly related, too.

But what I really want to say is that Sears (SHLD) is so heavily shorted that my broker (Vanguard) couldn’t borrow any for me to short. So I bought puts instead, and they’re doing pretty well.

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“As for the second part of not understanding. I believe the short interest is made up of two camps. Those who think BOFI is a scam and is doomed to crash; (These people are purely short and have no long positions)and those who think BOFI is probably a good company but have hedged their long positions with short ones. I think the latter is most likely the larger share of the two given that 89.99% of the shares are held by institutions”

I appreciate your speculation. And the research/stats. Where did you find that 89.99% figure?

One implication might be that institutions are very starved for yield and so are very willing to take on the risk associated with shorting. I wonder what is the historical perspective on institutional risk if we use shorting interst as a proxy for risk appetite.
I suspect there’s some stats on this (Overall institutional short interest) out there somewhere.

G

Long bofi

My broker won’t let me be long and short in the same account. I think if longs were looking for a hedge they’d more likely buy some puts. With the stock rallying premium shouldn’t be too high.

Rob

A short position against a long position does not make sense. A short position against options does – you cover the short position by exercising the option.

Say you short at 26 and buy calls with an exercise price of 25. If the stock goes up you break even (more or less). If it goes down you make money. This position can’t be squeezed.

Denny (does not short) Schlesinger

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I appreciate your speculation. And the research/stats. Where did you find that 89.99% figure?

G,

Yahoo Finance currently reports 81% owned by institutions.

https://finance.yahoo.com/quote/BOFI/key-statistics?p=BOFI

My TD Ameritrade summary is reporting 90%.

Thanks for the clarification Denny.

I am very LONG on BOFI, but have been thinking about what I’d do on the day after the lawsuit is finally announced.

If it is against BOFI, I’ll likely sell near break even or a loss depending on how fast it drops and if I’m available to be monitoring it at the time.

If it is in favor of BOFI, I’m not sure if I want to place a limit order at some high level to capture the spike in price or just ignore all the following days and wait it out for the long term ride with everything invested. I’ve previously posted about other spikes on high short interest companies and am leaning to doing a partial sell with a stop limit order at a ridiculous high price.

Just not sure how high that price might get and would hate to cut it short (pun intended). I do think it will be a multi-day event though and not just a single day pop based on what I’ve watched with other squeezes.

I am very LONG on BOFI, but have been thinking about what I’d do on the day after the lawsuit is finally announced.

Why do you think this will be such a huge binary event?

As I recall, this is just a case for unfair dismissal.

What’s the worst that can happen? Or, for that matter, the best?

The shorts focus on the allegations and insinuations that have been flung about, but these are not the subject of the litigation.

Settlement of the case either way should not affect BOFI materially.

If there was some way to either prove or disprove the more serious allegations, then that would be a different matter. But that would entail an action by the authorities independently of the Erhart case. And, so far, the authorities have shown no interest in taking action against BOFI.

Given the amount of attention and publicity received by BOFI over an extended period of time, it would be reasonable to conclude that if the authorities have found no case for BOFI to answer up until now, they are unlikely to do so in the future.

Ian

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BOFI is now at the lowest number of shares shorted in the last 12 months at 20.3M shares. It is still at 36% of float, a drop from 42%.

It has been a slow squeeze which should be more extreme if they ever finish the courts - I guess that can take another year.

I’m staying long and looking for more good earnings. Banking is still a good industry that should continue to get market support as regulations are removed next year.

I got a little concerned when I read that a much simplified tax code (a reported goal of the next administration) would lower the demand for tax help like H&R Block which BOFI gets customers thru. I doubt that the tax code will change much and think the current H&R customers would continue to go anyway.

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It amazes me that short interest is still 36% of float when the stock price has gone up significantly in the past month, is at the highest it’s been in the past 14 months, and seems to have a lot of things going for it right now.