Is Coinstar Inc. (CSTR) Ripe for a Short Squeeze?

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Coinstar Inc. (NASDAQ:CSTR) is one of the most heavily shorted stocks on the Nasdaq. Is the company ripe for a short squeeze? If shorts are forced to cover their bets against Coinstar, the stock could experience a powerful move higher.

Coinstar is heavily shorted

Unfortunately, short interest is not available in real-time; rather, it is reported bi-monthly. That said, as of the last report, shares of Coinstar inc. (NASDAQ:CSTR) are heavily shorted — over 50% of the company’s outstanding shares have been sold short.

Why have short sellers taken such an interest in the company? Famed short seller Jim Chanos may have started the trend. Last April, Chanos told CNBC his fund had begun betting against the company on the grounds that technological shifts were rendering its product obsolete (consumers were increasingly getting movies through digital downloading services, rather than renting physical discs).

After Chanos made those remarks, short interest steadily began to grow — from about 8 million shares March 2012 to a current short float of over 14 million shares.

Short squeezes can send stocks to new highs

Stocks that are heavily shorted have the tendency to undergo significant moves. Any good news can cause shorts to cover their bets — buying stock in the market and driving up the price. As the price rises, other short sellers (weary of losing money) cover their bets, in turn sending prices higher still.

This short squeeze tendency can have a tremendous effect on stocks. Take Netflix Inc. (NASDAQ:NFLX).

Shares of Netflix rallied about 60% in a very short period of time. On Dec. 31, over 13 million shares of Netflix had been bet against. By the middle of February, that figure had plummeted to about 8 million shares.

On Jan. 23, Netflix reported a profit of about $8 million. Wall Street had been expecting the company to post a loss of a similar amount. That single $8 million profit, in the subsequent sessions, added about $4 billion to the company’s market capitalization as shares went from trading near $100 to trading well over $160.

Were investors, so stunned by a $30 million profit, eager enough to rush out and buy shares? It’s certainly possible, but a more probable explanation may have been short sellers rushing out to cover their losing bets.

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