Herbalife Ltd. (HLF), J.C. Penney Company, Inc. (JCP): Ackman Is Just One Of Many Short Sellers Having a Tough 2013

Still, on average the ten most shorted stocks- per data from Bespoke Investment Group- have returned 16.7% year to date, narrowly beating the S&P 500’s 13% gain, on the strength of “short seller minefields” such as Questcor Pharmaceuticals Inc (NASDAQ:QCOR) (and that’s with SUPERVALU INC. (NYSE:SVU) just off the top ten list, at #11). Why have popular shorts tended to do so well? Part of the reason is that stocks with little borrow availability tend to be more expensive to short, with brokers charging short sellers. Between this factor and margin calls, it can be very costly to maintain a short position if a stock goes up at all- and, of course, given the rising market stocks have generally gone up.

Looking at the data at the individual level, we can see that none of the ten most shorted stocks from the beginning of this year has delivered a positive or negative return in the single digits- they’ve all gained or lost at least 12% year to date. This demonstrates that once a heavily shorted stock gets some upward momentum- say, from beating earnings expectations- short sellers bailing can create a vicious circle at least in the short term. Of course, large amounts of liquidity in the market also arguably tilt the playing field in favor of appreciating stock prices.

Unfortunately, we can’t really predict what direction the market will take for the rest of this year. As a result, our only conclusions here would be a further demonstration that risk management in shorting is paramount, as stocks may surge over 100% within several months.

Disclosure: I own no shares of any stocks mentioned in this article.