Recently, Herbalife Ltd. (NYSE:HLF) climbed above $60, meaning that billionaire Bill Ackman’s Pershing Square is finally underwater from its short of the stock last year. The stock has doubled year to date, but had dropped in late 2012 after Ackman had publicly disclosed the short; he began shorting at around $50, and the overall market has returned about 20% since that time. Herbalife Ltd. (NYSE:HLF)- which still has over 40% of the float held short as of the most recent data- is but the highest profile short target which has not only delivered positive returns year to date but in fact outperformed the market.
In fact, Herbalife Ltd. (NYSE:HLF) isn’t even the top performer of stocks with high short interest at the beginning of this year. A better candidate for that honor is SUPERVALU INC. (NYSE:SVU), an owner-operator of grocery stores. SUPERVALU INC. (NYSE:SVU) was trading at $2.50 at the beginning of this year, and rose as high as $8 recently (it currently trades at about $7.40 per share). About 40% of its float had been held short last December. Barry Rosenstein’s JANA Partners has caught some of this move; that fund initiated a position in SUPERVALU INC. (NYSE:SVU) in the first quarter of 2013 (find JANA's favorite stocks).
Ordinarily, small cap stocks are a good source of alpha for hedge funds and other major investors with the capacity to do in-depth research on individual companies; we’ve found, in fact, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). However, Questcor Pharmaceuticals Inc (NASDAQ:QCOR) and some other small caps have proven to be poor sources of alpha for short sellers. Nearly half of Questcor Pharmaceuticals Inc (NASDAQ:QCOR)’s float at the beginning of 2013 was held by short sellers, but after a jump of nearly $15 in one day in late July after a big earnings surprise it is now up about 150% for the year. The pharmaceutical company’s products are designed to treat multiple sclerosis and other medical conditions.
Of course, short sellers have had some victories. Ironically, it’s one of Ackman’s long positions- J.C. Penney Company, Inc. (NYSE:JCP)- which has proven to be one of the better shorts of the year (see Ackman's stock picks and read our analysis of his recent moves). The department store continues to be unprofitable, and in its most recent quarter revenue fell by 16% compared to the same period in the previous fiscal year.
It’s a challenging environment for brick-and-mortar general retailers as is, and so J.C. Penney Company, Inc. (NYSE:JCP) would have to pull itself back to profitability into the teeth of competition from Amazon.com, Inc. (NASDAQ:AMZN) as well as larger discount retailers such as Wal-Mart Stores, Inc. (NYSE:WMT).