The ONE Thing That Could Ruin A Great Investment
StreetAuthority | Apr 14, 2012 10:27AM ET
It's always intriguing to look at the list of the most heavily-shorted stocks. Many investors like to see which companies are expected to tumble by various short-interest gauges. Owning these stocks long-term can give pause, and perhaps a reason to sell if short sellers' arguments appear to be on the mark. Other investors use the list of the most heavily-shorted stocks to find short candidates themselves. And that's a huge mistake. That's because the most-heavily shorted stocks are often the biggest gainers when major events come to pass.
We've seen this phenomenon again in recent days. On Tuesday morning, April 10, distressed grocery chain Supervalu (NYSE: AM ), which makes greeting cards with 26 days to cover.
You should only look to go against short sellers with these stocks if your own research provides a clear case that business trends are OK and not in trouble as short sellers likely suspect.
Risks to Consider: It only pays to focus on a potential short squeeze if you think the market is going higher. A slumping market could well prove these short-sellers right, even if they're wrong.
Action to Take --> You should always check the size of the short position before investing in any stock. If you're going long, then you'll want to at least know what the shorts are thinking. And if you're thinking of going short, tread very carefully, lest you get caught up in a short squeeze if the total short position is already quite large.
By David Sterman
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