10 most shorted US stocks – UBNT, VRA & LIWA are the newcomers

In late August I introduced a new recurring feature, the 10 most heavily shorted US stocks in the market. At that point in time, Skullcandy (NADSAQ:SKUL) was beating others by a mile in terms of short interest. That still holds today, and Skullcandy sits at the top of the list with roughly 78 percent of its floating shares being shorted, down from 82 percent last month.

Being heavily shorted doesn’t necessarily mean that your company is a total train wreck (though you would expect it to be). Skullcandy is an excellent example of a company that has impressive financial performance - it is rated as a strong ‘Buy’ by analysts - but still the short interest is extreme. Such a stock is therefore an interesting candidate posed for a short squeeze, as any minor positive news could trigger short sellers to close their positions, increasing demand for the company’s shares and eventually the stock price.

Three newcomers
Out of the top ten most shorted stocks in September, three are new to the list. These are Ubiquiti Networks (NASDAQ:UBNT), Vera Bradley (NASDAQ:LIWA) and Lihua International (NASDAQ:LIWA).

Ubiquiti Networks
Ubiquiti Networks is a USD 633m network solutions provider that IPO-ed little less than a year ago at the price of USD 15 per share. Today the stock trades 29 percent lower than its initial price, or USD 12, after having reached a peaked of USD 35 in early May this year.

Currently the stock sits in 6^th place on the list with 49.7 percent of its float being held in short positions. Several shareholders of the company recently filed lawsuits against UBNT, claiming the company hid damaging business information after becoming public.

The seven analysts covering this stock have simply been following the trend of the market price and significantly lowered their targets for the past few months as the stock price has declined. This stock is an unlikely candidate for a significant short squeeze, but some short sellers might start taking profit following the decline in market price since April, which could result in temporary jump in price.

Vera Bradley
Vera Bradley is a specialty retailer focusing on accessories for women. Just like many of the constituents of the top ten, Vera Bradley is fairly new in the market (IPO-ed late 2010). Currently this stock holds the 9^th place, with 43.6 percent of its float being shorted.

Since a short time after the IPO, investors have held some proportion of the stocks float in short positions. That proportion has grown at a steady pace throughout 2011 and 2012YTD. While the short sellers seem certain the stock will continue to slide, analysts don’t agree. 73% of analysts covering the stock rate it as a ‘Buy’, signaling an average upside potential of 19 percent.  Recently analysts at JP Morgan upgraded the stock from a ‘Neutral’ rating to an ‘Overweight’. Although they have been maintaining the average ‘Buy’ rating, the average target price on the stock has been reduced significantly in recent months.

Vera Bradley currently trades at 14.4 times its FY1 earnings, significantly below its twelve month forward average P/E of 24 (avg. since inception of trading). Such a valuation is in line with some of VRA’s peers such as Coach (NYSE:COH), Macy’s (NYSE:M) and Laura Ashley (LON:ALY) who trade at 14.5, 11.2 and 13 times next year’s earnings.

Lihua International
Lihua International beat J.C. Penney (NYSE:JCP) and Questcor Pharmaceuticals (NASDAQ:QCOR) by a few percentage points and sits in the tenth place of the list. Lihua is a Chinese based company engaged in selling and producing copper cables and wire products.

With growth slowing down in China, Chinese stocks have increasingly become the targets of short sellers. Lihua is one of them. So far Lihua has lost 24 percent of its value YTD, and currently trades at a trailing P/E of 2.

The three stocks mentioned above replaced Horizon Pharma (NASDAQ:HZNP), Zillow Inc (NASDAQ:Z) and Bon-Ton Stores (NASDAQ:BONT) in the list of most shorted stocks.

Largest changes in short interest

When looking at the largest changes in short interest we find a few interesting stocks. Kayak Software (NASDAQ:KYAK), an online travel agency, has seen massive interest from short sellers after its IPO last summer. The company is in a very competitive market, as quite a few online travel agencies are already available. Currently the stock has 35 percent of its float sold short, and is a likely candidate for next month's top ten list.

Amongst the stocks experiencing reduced interest from shorters are Gap (NYSE:GPS), Zynga (NASDAQ:ZNGA) and Sprint Nextel (NYSE:S). Gap as surprised most analysts on its significant growth in sales over the past few months, and its stock has already gained 91 percent YTD. None of these stocks do however have significant amount of shares shorted.

Table 2 holds the 5 largest changes, positives and negatives. 

To repeat what I have said before: you shouldn't base your investment decision solely on short interest. It should be used as an added tool in your overall research. Sometimes it can be profitable to go against the short sellers, betting on a squeeze. In other cases, it is more advisable to follow the herd.