What Do Shorted Stocks Tell Us About The Economy?
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This next story is about a financial top 10 list you've probably never heard of. It's the list of the 10 most shorted stocks. A short is a bet that something will decline in value, so these are stocks that some people are betting will plunge. The latest numbers came out yesterday. Here with a countdown are David Kestenbaum and Robert Smith.
DAVID KESTENBAUM, BYLINE: Let's start with number 10. The tenth most shorted U.S. company right now is King Digital PLC.
ROBERT SMITH, BYLINE: King is a videogame company that I didn't realize made this game I see people playing all the time on the train.
(SOUNDBITE OF VIDEO GAME, "CANDY CRUSH")
KESTENBAUM: It is a very successful game. Here's Paul Kedrosky, venture capitalist.
PAUL KEDROSKY: Candy Crush was their big game.
KESTENBAUM: Oh, they're Candy Crush.
SMITH: Now I'm interested.
KEDROSKY: (Laughter) So if you're a big Candy Crush fan, you're on the other side of this particular trade.
KESTENBAUM: When a company is on the most-shorted list, it's often because there are two totally opposite stories people tell about its future.
SMITH: Sure. There's the good-news story. In this case, the people who make Candy Crush are geniuses. They know how to make a great, addictive videogame. They will make more great games.
KESTENBAUM: That's the story people who buy the stock tell. There is another story you can tell with a different ending.
KEDROSKY: The history of companies like this is that it's very difficult to do, sort of, the next thing. There's no sort of Candy Crush Two, Three and Four. So they have this rapid rise and then this complete collapse.
SMITH: In the story of this one shorted company is a fundamental question about the nature of success. Are these people super talented geniuses who can succeed again and again and again, or, as shorters think, was some big part of it just luck?
KESTENBAUM: OK, let's keep going. Number nine, JAKKS Pacific - that's a toy company - then Conn's Inc., electronics and appliance store.
SMITH: We have Goodrich Petroleum Corp., Wayfair, an online department store, 58.com in China.
KESTENBAUM: Number four - Insys Therapeutics.
SMITH: Insys is a pharmaceutical company.
KESTENBAUM: And if you think about what it takes to land on the most-shorted list, it helps if there's some possibility that something dramatic will happen - dramatically bad. What, you ask, could take down a business that is otherwise chugging along? The government.
SMITH: John Hempton is a hedge fund manager and a short-seller, and he says that is why Insys is on the list. The company sells pain medication - a very powerful one called fentanyl.
JOHN HEMPTON: It's actually about 20 times stronger than heroin. And the classic legitimate user of fentanyl is a terminal cancer patient who has very sharp but irregular pain.
KESTENBAUM: Fentanyl has also been showing up on the illegal drug market. Hempton says the short-sellers, himself included, have raised questions about this company's sales tactics, and they're betting that the government might intervene. Hempton at one point had shorted the company himself.
SMITH: We reached out to Insys therapeutics - did not hear back.
KESTENBAUM: The number-three most shorted company is a very popular company, GoPro
SMITH: You have seen the GoPro camera. People wear them while snowboarding, skydiving.
KESTENBAUM: Hempton says this is another classic example - a stock people love, maybe too much.
HEMPTON: There's a reasonable chance that in three years somebody makes a GoPro-type camera that's just as good as a GoPro, is just as attractive to my 14-year-old kid who mounts it on the bike, and costs $50. And like most technological devices, eventually the price collapses to the point that it's a toaster. I have a joke that every technological device eventually becomes a toaster.
KESTENBAUM: No one makes much money selling toasters.
SMITH: Number-two most shorted company is Pilgrim's Pride, a chicken producer. The number-one most shorted stock is a sports lottery company in China called 500.com.
KESTENBAUM: Paul Kedrosky says when he looks at what's on the list of most-shorted companies today, he actually finds it calming. You should've seen the list back in - oh, 2008, he says. It was a scary thing.
KEDROSKY: You won't be surprised to hear it was dominated by, you know, financial companies - in particular by, you know, mortgage insurers.
KESTENBAUM: Maybe if you think of it that way, this is a sign that the economy's in pretty good shape if the things that are most shorted are recreational items like GoPro and video games.
KEDROSKY: Right, right. It's exactly the sort of stuff that you would expect to happen in a - you know, just sort of a day-to-day world of sort of boring capitalism.
KESTENBAUM: Footnote for finance nerds - the data for our list comes from The Wall Street Journal. We are ranking by short interest as a percent of float. The rest of you can ignore that. I'm David Kestenbaum.
SMITH: And I'm Robert Smith, NPR News. Transcript provided by NPR, Copyright NPR.