2019 was difficult for short-sellers considering what ended up being a historically strong year for the broader equity market with the S&P 500 (SPY) returning 31%. Indeed, any bearish thesis based on an expectation that the U.S. and or global economy would spiral into a recession simply did not pan out or at least has not yet. The combination of supportive monetary policy, better than expected corporate earnings, and otherwise resilient economic growth was able to push stocks over the proverbial 'wall of worry' compared to fears in the first part of last year.

That being said, there were still plenty of opportunities to take short positions in companies with structural and fundamental challenges. One metric that often highlights stocks with underlying weaknesses is short interest data. What we find is that among the most shorted stocks with the highest short interest as a percentage of total shares outstanding, these companies typically attract increasingly bearish positioning for one reason or another, often time accompanied by significant volatility.

The Top 50 Most Heavily Shorted Stocks

Our data here includes only companies with a market cap of at least $250 million. The majority of the stocks with the highest short interest have some type of financial or operating weakness. There are exceptions of course, but we highlight that the average stock from the list below is down by 40% from its respective 52-week high and down by 17% over the past 1-year. This is in the context of the market exhibiting strong upside momentum in recent months. In many cases, climbing short interest has been a multi-year trend for these companies with the stocks down by even larger amounts from their all-time high going back many years. It's fair to say that a poor stock price performance simply attracts more bearish sentiment.

An important consideration is that we are looking at the short interest as a percentage of shares outstanding. This is different from the short interest by dollar value which is based on the number of shares shorts at the current market price. For example, Tesla Inc. (TSLA) with 24.95 million shares reported short is the "most shorted stock" based on a market value of the short position $18 billion based on the current share price. On the other hand, Tesla's short interest only represents 13.8% of total shares outstanding and thus does not make the list.


By our measure, GameStop Corp. (GME) is the most heavily shorted stock in the market with a reported short interest at 99% of its common shares. Indeed, multiple data sources including Yahoo Finance confirm the same amount. One explanation for how it's possible that the short interest can equal nearly all existing shares is that the stock held by institutions is loaned through a securities lending program. In this scenario, a corresponding buyer of those shorted shares subsequently lends the shares again, and those same shares are shorted multiple times.


For GME the scenario is even more interesting as the company has been active in buybacks which further reduces the share count. The company has been challenged by the market, a transition in video games away from physical disks to digital content resulting in declining sales. The company has responded by retrenching and closing underperforming stores. Given the short interest data, a potential turnaround by the company with better than expected results could set up a major short squeeze if short-sellers are ever forced to cover. Short sellers at this point are betting that the stock will eventually go to zero. It will be interesting to see how this one plays out.

Continuing with the theme of retail stocks, several retailers including Children's Place (PLCE), Bed Bath & Beyond (BBBY), Macy's Inc. (M), Dillard's Inc. (DDS), Hibbett Sports Inc. (HIBB), Baozun Inc. (BZUN), and Signet Jewelers Ltd. (SIG) are all on the list with significant short interest. The case here goes back to the general decline of brick and mortar shopping as a structural headwind resulting in lower store traffic as consumers favor e-commerce alternatives.


A couple of retail REITs including Tanger Factory Outlet Centers Inc. (SKT), Pennsylvania Real Estate Investment Trust (PEI), Washington Prime Group Inc. (WPG) are also among the most heavily shorted stocks in this case attracting bearish sentiment with their client base in the weaker industry segments.

** Bonus Most Heavily Shorted 51-100

Analysis and Forward-Looking Commentary

The theme in the market in recent months has been an expectation of rebounding global growth supported by continued strength in the U.S. labor market. The emergence of the Coronavirus outbreak has added a new twist with the ongoing situation creating a lot of uncertainty regarding the full economic impact. In a scenario where the market turns lower or the economic outlook deteriorates, we expect heavily shorted names to lead lower. We think investors should focus on quality companies and look for metrics like positive growth and free cash flow generation.

What's interesting here is that by better understanding why the market is bearish on these particular stocks, a contrarian type long-idea could represent significant upside potential should a short squeeze setup develop. A heavily shorted stock that can recover its operating and financial outlook with better than expected results can force shorts to cover their positions adding to buying pressure sending shares sharply higher. At the same time, some of these stocks could very well have much more downside ahead and eventually prove the short-sellers right.

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