Short interest is a key metric investors should pay attention to. When short interest is particularly high, it’s often indicative of real problems at a company. Yet, highly shorted stocks can be prone to periodic, powerful rallies. When a highly shorted stock begins to move higher, short-sellers can be forced to cover their bets — buying stock and driving the price higher still.
While there is no shortage of excessively shorted tech stocks, a few in particular stand out. BlackBerry Ltd (NASDAQ:BBRY), 3D Systems Corporation (NYSE:DDD), and Trulia Inc (NYSE:TRLA) are all being heavily bet against.
BlackBerry’s BB10 failure
More than 30% of BlackBerry Ltd (NASDAQ:BBRY)’s shares have been sold short. The Canadian handset maker has been a favorite among short-sellers for years now, and those that have bet against it have been right. Over the last five years, BlackBerry shares have lost more than 90% of their value.
Given that its market share has eroded so significantly, BlackBerry Ltd (NASDAQ:BBRY) lacks a robust app ecosystem, because developers won’t waste their time coding for the platform. The disadvantage appears too significant for the company to overcome — its announcement that it will seek strategic alternatives, including a sale of the company, seems to indicate as much.
Should BlackBerry Ltd (NASDAQ:BBRY) be acquired, short-sellers will take a big hit. Yet, if that doesn’t happen, BlackBerry’s business should continue to decline.
3D Systems: Too much hype or the next big thing?
Unlike BlackBerry Ltd (NASDAQ:BBRY), 3D Systems Corporation (NYSE:DDD) isn’t a business in decline. Rather, it’s shorted because investors believe the company gets too much hype.
3D Systems Corporation (NYSE:DDD) is a play on the emerging technology of 3-D printing. As a leader in the industry, 3D Systems stands to benefit from the widespread adoption of the technology. In theory, 3-D printers have the potential to revolutionize everything — from manufacturing to food preparation to health care.
Short-sellers see the stock as overexposed. With a price-to-earnings ratio of about 116, roughly eight times the broader market, 3D Systems Corporation (NYSE:DDD) certainly isn’t a cheap stock from a value perspective.
William Blair analyst Brian Drab has been bearish on 3D Systems Corporation (NYSE:DDD) for months. In May, he downgraded the stock to underperform, and reiterated that rating in July. In an appearance on Bloomberg, he argued that investors had unrealistic expectations.
Drab characterized 3-D printing as a niche technology, suggesting that it was “ridiculous” to assume that 3-D printers would find their way into everyone’s home. While he described the technology as “fascinating,” he believed the recent rally in the stock was overdone.
Evidently, lots of investors agree — almost 30% of 3D Systems Corporation (NYSE:DDD)’ shares have been sold short. Yet, unlike BlackBerry Ltd (NASDAQ:BBRY), 3D Systems’ bears have been burned. Shares are up nearly 90% over the last year.
Trulia is a high-flying tech stock dependent on the real estate market
Trulia Inc (NYSE:TRLA), too, has had an impressive rally over the last year, though it hasn’t even been trading for a full 12 months. The website went public last September, and shares are up almost 70% since then.
Investors might be inclined to lump Trulia Inc (NYSE:TRLA) with other recent Internet IPOs like Facebook Inc (NASDAQ:FB) and Groupon Inc (NASDAQ:GRPN). But in reality, Trulia might be better thought of as a play on housing. Trulia exists as an online marketplace for buyers, sellers, renters and landlords.
As long as the housing market in the U.S. is booming, Trulia Inc (NYSE:TRLA) should continue to perform well. On the company’s last earnings call, Trulia’s CEO said that the U.S. housing market appears to be in a recovery, and that all national metrics look “promising.”
But that was back in July. Since then, housing data has taken a turn for the worse. Data released this week showed that pending home sales fell in July — the second straight monthly drop on record. The rising mortgage rates may be the culprit, as the interest rate on a 30-year mortgage has spiked from roughly 4.1% in June to over 4.7% in August.
Higher mortgage rates drive down housing affordability, which could put a damper on an online real estate broker like Trulia Inc (NYSE:TRLA). If that’s the case, those shorting the stock could be right. Roughly 22% of Trulia’s floating shares have been bet against.
Investing in heavily shorted stocks
Heavily shorted stocks present an interesting opportunity to investors. On the one hand, the stock is being bet against for a reason — typically, market participants see a flaw in the company’s business model.
But the herd isn’t always right. Often, highly shorted stocks can prove their doubters wrong. When that happens, shares can rapidly appreciate, as the errant short-sellers are forced to cover their bad bets.
BlackBerry Ltd (NASDAQ:BBRY), 3D Systems Corporation (NYSE:DDD) and Trulia Inc (NYSE:TRLA) all present this opportunity to would-be investors. But whether they prove to be the next Tesla Motors Inc (NASDAQ:TSLA) or the next Eastman Kodak Company (OTCMKTS:EKDKQ) remains to be seen.
The article Short-Sellers Are Gunning for These Tech Stocks originally appeared on Fool.com.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends 3D Systems, Facebook, and Tesla Motors. The Motley Fool owns shares of 3D Systems, Facebook, and Tesla Motors and has the following options: short January 2014 $36 calls on 3D Systems and short January 2014 $20 puts on 3D Systems.
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