What do the shorts know?
Investors in record numbers are betting stocks will go down -- not a good sign.
February 25, 2002: 4:53 p.m. ET
By Adam Lashinsky
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SAN FRANCISCO (CNN/Money) - I got bullish for a few brief minutes on Monday when I saw that short interest on the New York Stock Exchange had hit record levels from mid-January to mid-February.
That's right, the idea that more and more investors were going short -- that is, betting that stocks would go down -- got me thinking that maybe enough people had finally sold out to clear the way for the long-awaited recovery.
Like I said, that was just for a few minutes.
Then I spoke to veteran short seller Marc Cohodes, a California-based investor for Rocker Capital, who reminded me that a lot of the rise in short sales could just be professional investors taking out insurance on their long positions.
As for the short interest that is attributable to genuine bearishness, well, short-sellers tend to do their homework. And if they see something, then you should be very, very afraid. Companies short sellers have targeted in the past -- long before their fall -- have included Tyco, Lernout & Hauspie and, yes, Enron.
Another case in point was Lumenis (LUME: down $3.99 to $8.95, Research, Estimates) a medical-products company in which Rocker maintains a short position. The short position in Lumenis shares rose from less than 1 million in the middle of last year to more than 7 million recently. The stock plunged Monday on news the Securities and Exchange Commission is looking into the company's accounting.
So which stocks are the short sellers targeting now? Cohodes offers Riverdeep (RVDP: up $1.15 to $19.71, Research, Estimates), an Irish educational software company. There were fewer than 2 million shares sold short in August. Recently, the short position had risen to nearly 6 million shares. Yet the stock is up about 18 percent so far this year.
Professional short sellers might be wrong. But they're known for doing their homework. The lesson here: If you own shares in a small company whose short position has gone up dramatically, you better ask yourself: Do you know as much about the company as the shorts do?
A word on corporate disclosure: My pal Andy Kessler, an analyst-turned-hedge-fund-manager-turned-journalist, makes a lucid case Monday for altering the definition of what companies must disclose as "material" information. In his Wall Street Journal column, Kessler argues that by forcing public companies to disclose more, investors will have an easier time distinguishing between who deserves their money and who's trying to game them. Kessler ends with the perfect reminder of the responsibilities of being a public company -- as well as the privileges: "If you don't want to disclose information, stay private, and try borrowing money from your local bank." Perfect.
Send e-mail to Adam at adam_lashinsky@timeinc.com.
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