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You Can Get Buy Signals From Short Selling

Mark Putrino

You may be surprised to hear this, but a large amount of short interest in a stock could actually be a buy signal.

What is short selling a stock? It’s selling a stock that you don’t own with the intention of buying it back at a lower price in the future, usually using options. And short interest is the number of shares that are sold short that haven’t been bought back yet. It is usually expressed as a ratio of shares that are short to the total number of outstanding shares.

The short interest can also be expressed as “Days to Cover.” This is the number of short shares divided by the average daily trading volume. In other words, it is the number of days that it would take for all the short shares to be bought back.

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I should note, this number should be considered understated, because it assumes purchasing 100% of the volume. This would be impossible in normal markets. It would be more realistic to assume that short sellers could only buy about 10%-15% of the average daily volume with adversely affecting the price.

You should pay attention to this because really high short-interest could be a bullish signal. This is because these shares need to be bought back. These short-sellers will all eventually become buyers!


Trupanion (TRUP)

Trupanion (NASDAQ:TRUP) provides medical insurance for cats and dogs. It has a subscription business and also offers insurance to companies that can provide it as a benefit to their employees.

There are about 11.2 million shares currently short. This is 38% of the outstanding float. The average daily volume recently is about 145,000. That means the days to cover would be about 77. And remember, that assumes buying 100% of the volume.

It would be more realistic to assume that one could only trade about 10% of the volume without adversely affecting the price. That means it could take years for the shorts to cover all of their positions!

Wall Street seems to disagree with the shorts. Six firms follow it and the all have buy ratings on it. The average price target is $40.


Accelerate Diagnostics (AXDX)

Accelerate Diagnostics (NASDAQ:AXDX) engages in developing and selling instruments that are used to fight infectious pathogens.

There are 14.1 million shares currently short in this company. That is 52% of the float. That means that there are guaranteed buyers for about half of the company’s stock!  Assuming that they buy 10% of the average daily volume, it would take about two years to cover it.

All four of the analysts who cover this have a buy rating on it according to Yahoo Finance.


OptiNose (OPTN)

OptiNose (NASDAQ:OPTN) develops and sells products that are for the treatment of ear, nose, throat and allergy illnesses.

The short-interest is 7.9 million, or about 49% of the float. Over the past year, the price of the stock has fallen from $30 to current levels around $9.

Wall Street doesn’t feel as bad about this company’s prospects as the short sellers do. It likes this stock. All four analysts that follow it have it rated as a buy and the average target price is $25. That is about three times higher then where it is currently trading.


Energy Recovery (ERII)

Energy Recovery (NASDAQ:ERII) develops and sells products that are for industrial fluid flow application. Their customers include oil and gas companies.

5.5 million shares are currently short. That is about 14% of the float. It isn’t as much as the other companies, but it is still pretty high. It only trades about 112,000 on a typical day, so that would give a days to cover number of about 50. Using our estimate of being able to only acquire about 10%-15% of the volume that trades with adversely affecting the price, it would take over a year to cover.

There are six buys on this company. The average target price is about $16, which is about 60% above current prices.


Seres Therapeutics (MCRB)

Seres Therapeutics (NASDAQ:MCRB) creates medicines “using live bacteria to treat diseases that result from functional deficiencies in the microbiome.”

The share price fell dramatically over the past month. The current short interest is 5.3 million of the float. That is about 25%. With an average daily volume of about 111,000, the days to cover is 48.

This company is followed by nine Wall Street firms. Seven have it rated as a buy and the other two have it as a hold. The average target price is $11 and it is currently trading below $5.


Theravance Biopharma (TBPH)

Theravance Biopharma (NASDAQ:TBPH) is a biopharmaceutical company. It focuses and the research, development and commercialization of small molecule medicines.

The short-interest ratio here is “only” 15%, or 6.3 million shares. The stock only trades about 154,000 shares on a typical day, so that is 41 days to cover.

Remember, it is safe to assume that they can buy about 10% of the volume without adversely affecting the price.

Seven firms follow this company. Four of them have it rated a buy and three have it as a sell. The average target price is just over $38 per share.

As of this writing, Mark Putrino did not hold a position in any of the aforementioned securities.

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