Bold investors are squeezing profits out of hated stocks, like GameStop. And ETFs offer a lower-risk way to dip your toe in this risky minefield, including some S&P 500 stocks. But beware.
In an odd twist, investors are exponentially driving up shares of the "most shorted" stocks in the S&P 1500 index, which includes the S&P 500. All 10 of the S&P 1500 companies with the most shares controlled by shorts versus shares available for trading (or "float"), including GameStop, National Beverage and Ligand Pharmaceuticals, are up. And many are up huge.
As a group, these heavily shorted stocks are up more than 65% on average — just this year. That's many times the 2.6% year-to-date rise in the S&P 500. So-called short-sellers borrow shares they think will fall and sell them. They then hope to buy the shares back later at a lower price, and return them to the original owner. Short sellers pocket the difference between the share price they borrowed the stock at minus the price they pay to buy it back later.
But short sellers face unlimited losses if the stocks they're betting against rally higher. What's more, the stocks get a boost as short sellers are "squeezed" and must buy the stock to cut their losses. And that's what's happening as individual investors inexplicably are piling into the the most-shorted stocks.
Shares of GameStop, the most shorted stock in the S&P 1500, are up more than 300% this year. "Point-and-click traders egged on by social media influencers pounced on individual stocks and rode them to excess," said Jack Ablin, strategist at Cresset Capital Management. Such moves are "leaving the little guy a bit richer and hedge fund fat cats licking their wounds."
Playing The GameStop Short Game
You might want a piece of the most shorted stock, GameStop, but you're most likely not ready for the risk. Keep in mind this is a stock that crashed more than 90% from 2013 until falling below 5 a share in 2019. The stock is now up to more than 340 a share. But analysts expect it to report a more than 90% plunge in 2020 profit. And they expect it to drop to an adjusted loss of $2.10 a share in 2021. Shorts control 151% of the number of shares available for trading.
Rather than speculating on that stock, you can own it and 87 other holdings with the Wedbush ETFMG Video Game Tech ETF. Nearly 8% of its portfolio is in GameStop, more than any other ETF, and it's the ETF's biggest single holding. But it also has significant holdings in other stocks in the red-hot video game industry. The ETF is up nearly 40% this year. Broader yet is the SPDR S&P Retail ETF, which puts 5.3% of its portfolio in GameStop. But it also spreads your bet across 84 other retailers' shares.
The Most Shorted S&P 1500 Stocks
Stocks facing biggest bets against them based on shares available for trade
| Company | Ticker | Short Interest /Float | Stock YTD % Ch. | Sector | Composite Rating |
|---|---|---|---|---|---|
| GameStop | 151.8% | 307.6% | Consumer Discretionary | 71 | |
| National Beverage | 82.8 | 31.2% | Consumer Staples | 94 | |
| Macerich | 71.0 | 61.6% | Real Estate | 48 | |
| Bed Bath & Beyond | 69.9 | 72.7% | Consumer Discretionary | 91 | |
| Ligand Pharmaceuticals | 64.4 | 56.9% | Health Care | 98 | |
| AMC Networks | 57.9 | 52.1% | Communication Services | 91 | |
| Tanger Factory Outlet Centers | 50.0 | 37.6% | Real Estate | 59 | |
| Tootsie Roll Industries | 43.8 | 17.4% | Consumer Staples | 36 | |
| World Acceptance | 39.1 | 8.3% | Financials | 81 | |
| PetMed Express | 37.7 | 9.4% | Consumer Discretionary | 84 |
Sources: IBD, S&P Global Market Intelligence
Not All Heavily Shorted Stocks Are The Same
Savvy investors know it's best to stick with time-tested rules and leading growth stocks. And some of the highly shorted stocks do have decent numbers.
Take National Beverage. The maker of the popular LaCroix sparkling water is highly shorted with 83% of shares available for trading controlled by short sellers. And yet, it's profitable and growing. Analysts think the company's adjusted profit per share will hit $3.61 in fiscal 2021, up nearly 30% from 2020. And with the stock up more than 140% in the past year, it carries an IBD Composite Rating of 94. That means its stock price growth and fundamentals outperform 94% of all other stocks.
And yet, investors may want to hedge their bets. Invesco S&P SmallCap Consumer Staples tilts more to National Beverage stock than any other ETF, at 3.7% of its portfolio. It turns out too, along with its other 21 holdings, to be well positioned as more smaller and more consumer companies take part in the market rally. This ETF is already up more than 10% this year, while the SPDR S&P 500 ETF Trust is up just 2.8%.
Know The 'Short' Risks
Don't let the huge gains in heavily shorted stocks blind you to the risk, says Ben Johnson, director of global ETF research at Morningstar. Investors looking at playing these stocks should be "peeling their face off the screens" and "going for a long walk outside," he said. Economic and earnings growth are the drivers of sustainable long-term investment gains, not shoving it to the shorts.
"I have no idea when or how this particular episode ends, but if it in any way rhymes with the many similar examples we can borrow from history — it doesn't end well for those that play along," he said.
ETFs With The Largest GameStop Positions
| ETF | Symbol | % Held In GameStop Stock | ETF YTD % Price Ch. |
|---|---|---|---|
| Wedbush ETFMG Video Game Tech | 7.5% | 39.4% | |
| SPDR S&P Retail | 5.3% | 41.8% | |
| Direxion Daily Retail Bull 3X Shares | 4.3% | 166.2% | |
| Invesco S&P SmallCap Value with Momentum | 3.7% | 28.3% | |
| Cambria Shareholder Yield | 3.6% | 18.3% |
