When it comes to finding ideas for swing trades, short interest is a key metric investors should focus on.
Take the recent move in Tesla Motors Inc (NASDAQ:TSLA). Shares have rallied nearly 90% in just the last month! While there’s been some good news to support that rally — a new leasing program, the paying back of government loans — the magnitude of the move was likely caused by Tesla Motors Inc (NASDAQ:TSLA)’s excessive short interest. Prior to the recent rally, nearly half of Tesla Motors Inc (NASDAQ:TSLA)’s shares had been sold short.
Admittedly it’s a dangerous game. Stocks that are heavily shorted, are shorted for a reason. But investors looking for the next Tesla-like move might consider magicJack VocalTec Ltd (NASDAQ:CALL), Coinstar, Inc. (NASDAQ:CSTR), and RadioShack Corporation (NYSE:RSH).
magicJack is facing fraud accusations
Most are probably familiar with magicJack VocalTec Ltd (NASDAQ:CALL) from the company’s frequent, yet fairly low quality, commercials. The company is focused on providing its magicJack VocalTec Ltd (NASDAQ:CALL) Internet-based home phone service, which is a cheap alternative to a land line phone.
In general, the company’s products get relatively poor reviews, and there’s the obvious secular trend away from home phones. But those factors are likely a small part as to why the company is being heavily shorted.
A blogger posting under the name Copperfield Research has accused magicJack VocalTec Ltd (NASDAQ:CALL) of fraud, claiming that the company has “wantonly misrepresented its financial results.” Even ignoring Copperfield’s posts, there is reason to be suspicious.
magicJack was formed out of a reverse-merger, a sketchy process that has produced such companies as RINO International and Sino-Forest. Moreover, the company has been engaging in a relatively bizarre process, selling put options on its own stock to generate income.
As of May 15, about 4.7 million shares had been sold short. As there are only about 18.6 million shares outstanding, magicJack has a short interest of over 25%. What’s more, magicJack VocalTec Ltd (NASDAQ:CALL) is a relatively small company, with a market cap of just under $300 million, which means that it could be prone to fairly significant swings.
Oppenheimer’s Tim Horan is the only major financial analyst covering magicJack VocalTec Ltd (NASDAQ:CALL). He’s liked the stock for months, and continues to give it an Outperform rating, though he did cut his price target in April.
Coinstar relies on RedBox
The majority of Coinstar, Inc. (NASDAQ:CSTR)’s profit comes from its RedBox movie rental subsidiary. A number of short sellers, such as Jim Chanos, believe that business is facing secular decline.
Although RedBox has benefitted from the bankruptcy of Blockbuster and other major movie rental stores, it is itself ultimately doomed, according to Chanos. Increasingly, consumers are turning to digital outlets to rent their movies — either over the Internet, or through their cable providers.
Coinstar, Inc. (NASDAQ:CSTR)’s management even appears to agree with this line of reasoning, to some extent. Coinstar, Inc. (NASDAQ:CSTR) has been investing heavily in other kiosk concepts, such as its Seattle’s Best Coffee “Ruby” kiosks. If these new machines cannot replace RedBox, Coinstar, Inc. (NASDAQ:CSTR)’s business is in trouble.
More than 40% of Coinstar’s outstanding shares have been sold short, but this is down in recent months, when short interest was over 50%.