What do Sirius XM, Herbalife, and Iconix all have in common?
They are all both loved and hated by the Street.
All three stocks are at or near multi-year highs. Sirius is up 56% in the last year, while Herbalife has jumped 48% and Iconix has posted the best performance of the lot – with an astounding 73% gain. And yet despite those performances, or perhaps because of it, investors continue to bet against those stocks by shorting them. Short interest – that is to say, the number of bets that a stock will fall – runs high in all three stocks. 9% of tradable Sirius shares are sold short. For Iconix, it’s almost 17%. Herbalife? 40%.
(Watch: Buying back Herbalife?)
Call it a case of being so bad, they’re actually good.
A little context here: when investors go short, they are hoping to profit from a stock decline by selling borrowed shares and then buying them back later for less money. Shorting is profitable when stocks fall, but it can be painful when they rise. If you short a stock at $50, and it goes to $70, you just lost $20, or 40% of your bet. Worst of all, unlike buying a stock, shorting can expose you to unlimited losses: while a stock can only fall to zero, it can – theoretically, at least – rise forever. Just ask the poor sap who bet against Apple five years ago. Think of it as the flip side of buying.
Oftentimes, in names with big short interest, investors are squeezed out of their positions as the stock rises and they are forced to close out their short bets by repurchasing that stock. That buying pressure often forces a stock higher, much to the chagrin of the bear.
But in the case of these three names, another dynamic appears to be at work in their favor: a shrinking float.
I know what you’re thinking: enough with all this jargon. But this is an important point.
The float is the total number of shares available to the public to trade. It’s calculated by subtracting the restricted shares – stock held by insiders and employees – from outstanding shares. As the float shrinks, that short squeeze dynamic becomes more profound.
And according to a new report from TrimTabs, that appears to be what’s happening with Sirius, Herbalife, and Iconix. Each of those companies has seen a reduction in the amount of tradable shares through various corporate actions.
So will this all lead to even higher stock prices? Will hate conquer love? Click the video above and see what TrimTabs Founder & Chairman Charles Biderman has to say.