When Being ‘Short’ Backfires! – Navistar International Corp (NAV), Pandora Media Inc (P), Apple Inc. (AAPL)

Typically, when stocks see rallies such as this it creates more short interest, and shorts have rapidly acquired almost 40% of its float. This is another case that makes sense. It’s a stock that has rallied over 300% due to speculation. However, up until this point, the short interest has backfired, and as a result, many of the shorts have been forced to cover, which indirectly pushes the stock even higher. The process of understanding such outcomes can actually benefit longs in trying to profit from the pessimism of shorts, but in this case, my belief is that shorts will soon get this one right.

Conclusion

In my book, Taking Charge With Value Investing (McGraw-Hill, 2013), I discuss unmeasured fundamentals to explain how investors can use these things to make better investment decisions and to capitalize on overly pessimistic behavior. One topic is identifying the difference between a justly short stock and one that is not. For example, stocks such as UNXL and PANL are appropriately shorted, as most reasonable investors understand that it is simply a domino effect that is leading to such large gains. However, in the case of stocks such as Pandora Media Inc (NYSE:P) or even Navistar International Corp (NYSE:NAV), investors’ pessimistic long-term outlooks can often be beneficial and create large gains when a catalyst presents itself.

To better explain, I’ll conclude with Spectrum Pharmaceuticals, Inc. (NASDAQ:SPPI): This is a company that has seen multiple years of growth, has three FDA approved products, 10 drugs in its pipeline, a P/E ratio of 8, yet still has a short ratio of 33.30. The presence of shorts will keep the stock volatile (100% more volatile than the market), and will keep it from appropriately appreciating to reflect fundamental performance. But as we’ve seen in the past, eventually the overly pessimistic outlooks will create large and sudden gains. The key is patience, being able to remain calm and logical despite frustration, and you will then reap the benefits when being short backfires.

The article When Being ‘Short’ Backfires! originally appeared on Fool.com and is written by Brian Nichols.

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