Most investors buy stocks in the hope that they'll go up. But those who sell stocks short actually root for their share prices go down. Borrowing shares to sell on the open market, short-sellers hope that stocks will fall so they can later replace those shares more cheaply, pocketing the difference.
Plenty of short-sellers have made huge profits by betting against struggling companies. But often, even the companies that attract the most attention from short-sellers are able to post substantial gains
in their shares, causing big losses to those who sell short and have to pay much more to replace shares. Let's take a look at four companies in the S&P 500 (INDEXSP:.INX)
that are popular targets for shorts yet have performed strongly so far in 2013.
Netflix, Inc. (NASDAQ:NFLX)
is the worst nightmare of short-sellers, with its stock having more than tripled so far this year. With nearly 14% of its shares sold short, however, plenty of investors think its best days are behind it.
One reason why Netflix, Inc. (NASDAQ:NFLX) attracts short-sellers is that it has a history of rewarding skeptics during past bull-market runs. From late 2008 to mid-2011, the stock climbed about 15-fold, but then spectacularly crashed 75% after the infamous Qwikster debacle and the price-hike that resulted from the separation of its DVD and streaming-video businesses. After spending a year in the doldrums, though, Netflix, Inc. (NASDAQ:NFLX) was able to restore investor confidence in light of strong growth, and now, the stock is back at those 2011 highs. Whether lightning will strike twice remains to be seen, but shorts are obviously hoping for a repeat of Reed Hastings' previous mistakes.
GameStop Corp. (NYSE:GME)
has an even higher short interest at 17%, but its stock has doubled this year. For years, bearish investors have predicted the demise of the retailer best known for its sales of used video games, on which it has built a high-margin niche business.
Digital distribution of games was supposed to both cut GameStop Corp. (NYSE:GME) out of the loop as a middleman-retailer and help prevent gamers from trading in old games, effectively destroying GameStop Corp. (NYSE:GME)'s business model. Yet that scenario hasn't played out, and now with major game-console manufacturers finally coming out with refreshed offerings in their respective key franchises, investors expect at least a temporary boom for the retailer in the near future.
A similar story has also helped boost shares of Advanced Micro Devices, Inc. (NYSE:AMD)
, also a favorite of short-sellers and also a big gainer this year. With short interest at 22%, the stock has climbed nearly 50% this year as the chipmaker has refocused its efforts on serving the game-console industry.