When it comes to short selling, there’s a key metric traders need to watch for:short interest. When short interest in any particular stock gets too high, short sellers are leaving themselves exposed to the possibility of tremendous losses.
First Solar, Inc. (NASDAQ:FSLR) burned the shorts on Tuesday
Anyone caught short First Solar, Inc. (NASDAQ:FSLR) Tuesday likely felt considerable pain.
Shares of the company exploded to the upside Tuesday afternoon, rallying over 50% at one point. First Solar said it expected to post earnings per share of $4-4.50, more than the $3.51 analysts had forecast. In addition, the company anticipated sales of $3.8-4 billion in 2013 — more than the $3.1 billion estimate.
Short interest is not reported on a real-time basis, but as of the last report, almost one-third of the company’s floating shares had been sold short. Investors are likely bearish on the company’s future prospects given the possibility of reduced government subsidies and competition from China.
While the guidance boost was impressive, it may not have warranted a 50% rally — boosting the company’s market cap by roughly $1 billion. Rather, the high short interest likely prompted some traders to cover their positions, leading to an excessive move — a short squeeze.
Netflix, Inc. (NASDAQ:NFLX) nearly doubled because of high short interest
In January Netflix, Inc. (NASDAQ:NFLX) shares surged, nearly doubling in only a few weeks after the company posted better-than-expected earnings. For the quarter, analysts had been looking for a loss. Instead, the company posted earnings of $0.13 per share, while adding about two million subscribers to its streaming service.
At the time, Netflix was heavily shorted. On Jan. 15, about 10 million shares of Netflix, Inc. (NASDAQ:NFLX) had been sold short, or roughly one-fifth of the outstanding shares.
As evidence of the fact that a short squeeze had prompted Netflix’s impressive run, short interest declined over the coming weeks as those who had been caught short in Netflix, Inc. (NASDAQ:NFLX) likely covered their positions.
Tesla Motors Inc (NASDAQ:TSLA), Coinstar are the stocks to watch
Of the floating shares, more than 44% of Tesla’s shares have been bet against. Those short Tesla are likely banking on the failure of electric cars — rival Fisker recently declared bankruptcy. Tesla Motors Inc (NASDAQ:TSLA) has also engaged in some provocative tactics lately, like asking customers to pull forward their orders of the company’s cars. Meanwhile, CEO Elon Musk has drawn excessive media controversy.
Coinstar, Inc. (NASDAQ:CSTR) is even more heavily shorted, as nearly half the outstanding shares have been bet against. In Coinstar’s case, bears are likely betting on the demise of the company’s Redbox kiosks. Redbox provides disc rentals, and as more video content is consumed over the Internet, the need for discs diminishes.
But, despite their problems, the risk/reward profile seems biased to the upside. If either Tesla Motors Inc (NASDAQ:TSLA) or Coinstar, Inc. (NASDAQ:CSTR) can surprise investors like First Solar, Inc. (NASDAQ:FSLR) on Tuesday, their stocks could see equally as impressive rallies.