The 10 most heavily-shorted US stocks now vs. industry averages

Having explained in this educational piece what short selling, short interest and short squeezes are, let's look at the 10 most heavily-shorted stocks within the US stock market. The reason for focusing on the US stock market is simply because of the reliability of the data available.

Table 1 holds the 10 stocks sharing the questionable honor of being the most shorted stocks in the US market. The headphone developer Skullcandy Inc (NASDAQ:SKUL) beats the nine others by a mile, with 82 percent of its floating shares being sold short. This is more than 10 times the consumer discretionary industry average.

Not only is Skullcandy being heavily shorted, but the interest for borrowing and selling shares has increased by 11.7 percent for the past month. Investors really seem to dislike this stock and believe the only way is down!

Several other stocks that have IPO-ed in recent years such as Tesla Motors (NASDAQ:TSLA), Opentable (NASDAQ:OPEN) and Zillow Inc (NASDAQ:Z) are on the list, but none are even close to Skullcandy’s position. You might have expected to see stocks like Facebook (NASDAQ:FB), Groupon (NASDAQ:GRPN) or Zynga (NASDAQ:ZNGA), on the list, but those do not even come close. Facebook, Groupon and Zynga have ‘only’ 15.9, 17.4 and 4.5 percent of their floating shares sold short.

Had you gone the opposite way, an evenlyweighted portfolio of these 10 hated stocks would have given you 11.6 percent return for the past 12 months and 34.4 percent YTD. In comparison the S&P500 has returned 19.8 percent for the past 12 months and 12.1 YTD.

Most shorted industries

Despite some stocks being heavily shorted by investors, short interest is relatively low on an industry average. Out of the 282,8bn shares floating in the S&P500 index, only 7.2bn are being held for short positions (roughly 4.1 percent of total float). Similarly 5 percent of the 140bn shares floating on the NASDAQ exchange have been shorted by investors. Looking at the overall US stock market, 4 to 5 percent of short interest isn’t too bad.

The short interest is far from being evenly split between sectors. As of today, Telecommunication Services and Consumer Discretionary are the two sectors most heavily being sold short, based on a simple average (chart 1). Chart 1 shows two ways of calculating the average short interest, simple average and market value weighted. When the same data is analyzed on a market value weighted basis it is consumer discretionary and health care who take the top two spots.

With the difference between the two weighting method we can see that most industry shorting is heavily biased towards small cap stocks. It is rare that the majors within an industry, such as Coca-Cola (NYSE:KO), Microsoft (NASDAQ:MSFT) or Exxon (NYSE:XOM) are exposed to significant short selling.

Just because these stocks and industries are the most shorted ones doesn’t mean their stock price cannot perform in the future. Should these stocks take the short selling investors by surprise and deliver positive surprises to the market, the stock price could go through the roof as short-term demand for shares can increase fast. Once a stock that is heavily shorted starts showing an upward trend in the market, the short sellers get squeezed and look to close their positions, pushing the market price even higher.

Just because short interest is interesting to follow doesn’t mean you should solely base your investment decision on it. Keeping track of short selling should just be used as an added tool in your overall research.  In addition to using this piece as your source, information on short interest can be found on both NYSE & NASDAQ websites.