Traders work on the floor of the New York Stock Exchange.
Short selling is among the most controversial investment practices and has been blamed for sharp sell-offs in the stocks of a number of large companies, especially financial firms. Governments in both the U.S. and other developed countries are considering banning or seriously restricting the practice of short selling. When financial stocks were dropping rapidly late last year, taking short positions in some banks and brokerage stocks was actually forbidden.
There are a limited number of stocks which consistently have short interests above 50 million shares. They are the shares in companies that short sellers move in and out of the most often. (See pictures of the Top 10 scared traders.)
The reasons that theses stocks are so heavily shorted is a combination of their trading volume, their numbers of shares outstanding, and their susceptibility to big price swings caused by news and rumors.
The ten favorite stocks for short sellers are a combination of financial, tech, conglomerate, auto, and big pharma companies — a sign that when Wall St. bets against companies it has no favorite sectors.
The top ten stocks for short sellers:
1. General Electric (GE) used to be a fairly stable company with a fairly stable stock price. Problems with earnings, missed forecasts, and speculation about the health of its financial services division have made GE's stock volatile and sensitive to rumors. As of April 15, the short interest in GE dropped 6% compared to the measurement two weeks before to a total of 197 million shares. Over that period, GE traded an average of 136 million shares a day, so the short interest is tiny compared with the volume. For short sellers, that is a big plus. High trading volume lets them get in and out of GE shares with ease. And, GE's stock is volatile for a mega-cap company. Since the beginning of the year, the share of the conglomerate have been as high as $17 and as low as $5.87. For a firm with a market value of $128 billion, trading in that big a range is extraordinary.
2. Citigroup (C) is the most shorted stock in America. As of April 15, the bank had a short interest of 1.237 billion shares. Its trading volume average of the prior two weeks was 532 million shares a day. Citi has an extraordinary 24% of its float sold short, a sign that a huge number of investors are willing to gamble against the share price. Citi's stock is subject to wild swings, in part because the short sellers in the company's shares have been "squeezed" more than once this year — forced to cover when the banks had good news. That covering magnified the rebound in Citi's share price. Citi is a "rumor a day" stock. Recently, the market has speculated about the fate of the bank's CEO, Vikram Pandit, whether the firm will have to raise money because of government stress tests, and whether the bank can maintain the earnings it posted for the first quarter. So far this year, the stock has traded in a range of $7.46 to $.97, a short seller's dream.
3. AIG (AIG) is another stock which has traded in the pennies since the beginning of 2009, even though it was the premier insurance company in the world just four years ago. Shares short in AIG fell 3% during the most recent period to 278 million, against an average daily volume of 125 million shares. Eleven percent of the financial firm's float is now sold short. AIG's stock can more up or down 15% on any given day based on information about whether the government will have to add to its $13o billion commitment to the firm and news about its desperate attempts to auction off its divisions to get money back to taxpayers. The stock is remarkably volatile. It has been as low as $.33 and as high as $1.74 since the beginning of the year.
4. Ford (F) had 113 million share sold short as of April, an extraordinary drop of 53% since two weeks before that. The stock was up 47% to $4.04 over that period which wiped out a number of short positions. Since then, the shares have moved even higher on earnings and analyst upgrades and change hands at more than $5. Ford trades a tremendous 121 million shares a day. Any news about the potential bankruptcy of GM (GM) or Chrysler moves Ford's stock due to concerns, among others, that a liquidation of either of those firms could bring down parts suppliers that serve the entire industry. The monthly release of domestic unit sales also pushes the stock up and down.