There's never a shortage of naysayers on Wall Street.
There are plenty of investors betting against publicly traded companies by selling them short, hoping to profit if the share prices head lower. However, some stocks have unusually large sums of short-sellers relative to their typical trading activity. This results in a high short interest ratio, and it's something that both bulls and bears need to watch closely.
The short interest ratio is easy enough to calculate. Take the total number of shares sold short, and divide that by the average number of shares in that stock that trade in a day. That's the short interest ratio, or the number of days that it would take to cover all of those bearish positions given typical trading volume.
There could be some legitimate reasons for high short interest ratios. A stock could have a lot of convertible debt out there and investors are merely hedging their equity risk. However, for the most part, a stock with a high short interest ratio is also a logical candidate for a short squeeze, sending the stock higher at the first whiff of a positive catalyst as the worrywarts scramble to close out their positions.
Let's take a look at a few companies with unusually high short interest ratios as of late last month.
| Higher One (NYSE: ONE ) | 10.2 million | 138,449 | 73 |
| Exelixis (NASDAQ: EXEL ) | 37.5 million | 838,530 | 45 |
| Capstone Turbine (NASDAQ: CPST ) | 32.9 million | 1,021,654 | 32 |
| Fusion-io (NYSE: FIO ) | 28.8 million | 1,016,985 | 28 |
| IMAX (NYSE: IMAX ) | 14.2 million | 512,971 | 28 |
Source: Barron's.
Feeding the bears
Higher One was a promising trailblazer a few years ago, offering colleges and their coeds a cost-efficient way to manage financial aid and refunds. There have been a few hiccups along the way, and now growth has slowed dramatically. The good news for Higher One is that it still watches over millions of accounts and its retention rate with campuses is holding up well. Adjusted revenue growth of 9% last year isn't too shabby.
Exelixis is hard at work tackling cancer. Shorts were left stinging last week when the stock soared 14% after delivering inspiring preclinical data detailing the effectiveness of its lead compound's ability to treat cancer tumors that have metastasized to the bone. However, the approval process is torturously long, and shorts are naturally betting that Exelixis won't pan out.
Capstone Turbine is making co-generation turbines that run on different fuel types. Capstone isn't profitable, but Wall Street's banking on breakeven results for its latest fiscal year that started this month. Capstone has had no problem getting potential customers to buy in, closing out its latest quarter with $136.5 million in orders. Last week it announced its first order for micro-turbine energy systems for China's oil and gas market.
Fusion-io has had a volatile trading history since going public two summers ago, and that's probably part of the appeal for short-sellers here. Its ioMemory platform provides a storage solution that speeds up virtualization, databases, cloud computing, big data, and performance applications. Growth was certainly there last time out. Revenue soared 43% in its latest fiscal quarter, and profitability more than doubled. However, Fusion-io's guidance called for a sharp sequential dip. We'll know how that plays out in next week's report.
Finally, we have IMAX. Critics have been arguing that the multiplex is dead, suggesting that IMAX's supersized theatrical experiences won't be enough to save the movie theater industry. Reality has gone with more of a Hollywood ending. IMAX continues expanding, and movie studios continue to embrace the fast-growing premium platform. Just yesterday, IMAX announced further expansion in Mexico and a deal to carry more Paramount Pictures releases.
Waiting is the hardest part
All five of these companies have their challenges, but it's easy to see how positive catalysts in upcoming quarterly results -- or upbeat events along the way -- could send the shorts scrambling for the exits, driving the shares higher in a short squeeze.
Shorting these five companies doesn't seem like a bright idea, but it would be a boring marketplace if everyone were bullish.
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