Short interest is a key metric investors should pay attention to. When short interest is particularly high, it’s often indicative of real problems at a company. Yet, highly shorted stocks can be prone to periodic, powerful rallies. When a highly shorted stock begins to move higher, short-sellers can be forced to cover their bets — buying stock and driving the price higher still.
While there is no shortage of excessively shorted tech stocks, a few in particular stand out. BlackBerry Ltd (NASDAQ:BBRY), 3D Systems Corporation (NYSE:DDD), and Trulia Inc (NYSE:TRLA) are all being heavily bet against.
BlackBerry’s BB10 failure
More than 30% of BlackBerry Ltd (NASDAQ:BBRY)’s shares have been sold short. The Canadian handset maker has been a favorite among short-sellers for years now, and those that have bet against it have been right. Over the last five years, BlackBerry shares have lost more than 90% of their value.
The rise of iOS and Android has more or less obliterated BlackBerry Ltd (NASDAQ:BBRY)’s smartphone business, and it’s unlikely that it will bounce back anytime soon. The company’s BB10 operating system, intended to rejuvenate BlackBerry, has failed to catch on, and has sold below expectations.
Given that its market share has eroded so significantly, BlackBerry Ltd (NASDAQ:BBRY) lacks a robust app ecosystem, because developers won’t waste their time coding for the platform. The disadvantage appears too significant for the company to overcome — its announcement that it will seek strategic alternatives, including a sale of the company, seems to indicate as much.
Should BlackBerry Ltd (NASDAQ:BBRY) be acquired, short-sellers will take a big hit. Yet, if that doesn’t happen, BlackBerry’s business should continue to decline.
3D Systems: Too much hype or the next big thing?
Unlike BlackBerry Ltd (NASDAQ:BBRY), 3D Systems Corporation (NYSE:DDD) isn’t a business in decline. Rather, it’s shorted because investors believe the company gets too much hype.
3D Systems Corporation (NYSE:DDD) is a play on the emerging technology of 3-D printing. As a leader in the industry, 3D Systems stands to benefit from the widespread adoption of the technology. In theory, 3-D printers have the potential to revolutionize everything — from manufacturing to food preparation to health care.
Short-sellers see the stock as overexposed. With a price-to-earnings ratio of about 116, roughly eight times the broader market, 3D Systems Corporation (NYSE:DDD) certainly isn’t a cheap stock from a value perspective.
William Blair analyst Brian Drab has been bearish on 3D Systems Corporation (NYSE:DDD) for months. In May, he downgraded the stock to underperform, and reiterated that rating in July. In an appearance on Bloomberg, he argued that investors had unrealistic expectations.
Drab characterized 3-D printing as a niche technology, suggesting that it was “ridiculous” to assume that 3-D printers would find their way into everyone’s home. While he described the technology as “fascinating,” he believed the recent rally in the stock was overdone.
Evidently, lots of investors agree — almost 30% of 3D Systems Corporation (NYSE:DDD)’ shares have been sold short. Yet, unlike BlackBerry Ltd (NASDAQ:BBRY), 3D Systems’ bears have been burned. Shares are up nearly 90% over the last year.
Trulia is a high-flying tech stock dependent on the real estate market
Trulia Inc (NYSE:TRLA), too, has had an impressive rally over the last year, though it hasn’t even been trading for a full 12 months. The website went public last September, and shares are up almost 70% since then.
Investors might be inclined to lump Trulia Inc (NYSE:TRLA) with other recent Internet IPOs like Facebook Inc (NASDAQ:FB) and Groupon Inc (NASDAQ:GRPN). But in reality, Trulia might be better thought of as a play on housing. Trulia exists as an online marketplace for buyers, sellers, renters and landlords.