WINDERMERE, Fla. (Stockpickr) -- Nothing makes me happier than identifying market-leading stocks for my readers. These are the names that tend to outperform the best and rack up huge gains for investors who get in early and ride the trend.
These stocks reward the trend followers, like me, who like to buy strength rather than buy stocks that aren’t acting right in hopes they someday recover. Part of the discipline of buying market-leaders is having the wiliness to pay up to own a stock. The thinking behind this strategy is that when a stock starts to break out and print new highs, it’s merely the start of a much larger move up. Of course, that doesn’t always mean it will trend higher, but the probability of an uptrend does increase dramatically.
Another component of market-leading stocks that not a lot of market pundits talk about is that many of these names are heavily shorted. A great example of this is the recent action in LinkedIn (LNKD), a stock with 37.1% of the float currently sold short. Everyone seems to hate this stock or think it's overvalued since it trades at a very rich valuation and doesn’t produce much in earnings. In just the last month, this stock has rocketed up over 27 points, or 36%, from a recent low of $60 to a recent high over $100 a share.
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As LinkedIn made this amazing run, I have watched other traders bash the company and call it overvalued. Many of those opinions have merit, but I must ask the bashers: “What good did that do for your profit-and-loss statement?”
The objective when trading on Wall Street is to make money, not to be right. Many traders fall victim to the habit of letting their opinions get in the way of making money, and LinkedIn has been the perfect example of this. Of course, this is pure human nature, and it’s what makes markets, since a market wouldn’t be efficient if people didn’t have varying views.
That said, I like to put my opinion aside entirely and simply trade what the market is doing. I simply follow the action and try to decipher the bigger trend in a stock, or the overall market, and place my bets accordingly. When that comes to playing potential market-leaders, I take a lot of pride in finding the leaders that are heavily shorted. These names tend to show up on the list of the best-performing stocks.
With this in mind, let’s take a look at some heavily shorted market-leading stocks that could be poised for more gains.
Netflix
One heavily shorted market-leading stock is Netflix (NFLX), an Internet subscription service streaming television shows and movies. Nothing defines "market leader" like the numbers that this stock has put up so far in 2011. Shares of Netflix have soared so far this year by more than 65%.
Netflix has been the ultimate play on a slower economy as consumers turned toward their services for a cheap form of entertainment. On July 12, the company made several changes to its movie rental pricing plan that resulted in a 60% jump in the cost of its combined package of one-at-a-time unlimited DVDs by mail and unlimited streaming TV shows and movies. The price of the deal went from $10 a month to $16 a month.
The bottom line here is that Netflix won’t be hurt by this price increase unless there’s a mass exodus of clients. I don’t think that’s going to happen as long as Netflix continues to expand its library of movies and improve its streaming services. Plus, the nearest competitors still don’t come close to Netflix's offerings, even with the $6 increase.
If Netflix's price hike works, it’s going to lead to higher revenues and potentially higher profits. This is going to boost the stock in the longer term and reward shareholders. It’s going to end up causing much more pain for the short-sellers if the company is on point with their execution.
The current short interest as a percentage of the float for Netflix is a rather large 19.5%. It would take the bears three days to cover all of their short bets at an average daily volume rate of 3.7 million shares.
Netflix, one of the 10 Best-Performing S&P 500 Stocks of 2011, was recently highlighted in "5 Big Stocks to Trade for Gains." I previously featured the stock in "Stocks to Consider for the End of QE2."
Spectrum Pharmaceuticals
A market leader in the biotech space that has a healthy short interest is Spectrum Pharmaceuticals (SPPI), which is dedicated to speeding the delivery of new treatment options to patients by working to improve existing therapeutics through the application of highly specialized drug targeting platforms and formulation expertise. This stock has been crushing the shorts so far in 2011, with shares up over 50%.
Spectrum is firing on all cylinders after reporting a bullish first-quarter result in May that came in well ahead of analysts’ expectations. The company reported net income of $12.8 million, or 23 cents per share, vs. a net loss of $39 million, or 80 cents per share a year ago. Revenue soared to $43.6 million from $11.1 million.
This strong quarter was spurred by strong results for Fusilev, which saw sales soar to $35 million from just $600,000 last year. Fusilev is a colon cancer drug that has been benefiting from short U.S. supplies of its generic competitor leucovorin. That supply issue for leucovorin is still happening right now. This should lead to a very strong second quarter for Spectrum when it reports results in the middle of August.
This makes the stock a very attractive long trade heading into August since there are so many shorts in the name. We could easily see a massive short squeeze ahead of the second-quarter as the bears get worried about their positions in front of what should be a blow-out number.
The current short interest as a percentage of the float for Spectrum is a notable 16.7%. The short-sellers have been increasing their bets on the stock from the last reporting period by 16.2%, or around 1.1 million shares. It would take the bears five days to cover all of their short bets at an average daily volume rate of 1.7 million shares.
Spectrum Pharma shows up on a recent list of Hot Biotech Trades for Second-Half 2011.
Raptor Pharmaceuticals
Another market leader in the biotech complex where the shorts are piling into is Raptor Pharmaceuticals (RPTP), which is dedicated to speeding the delivery of new treatment options to patients by working to improve existing therapeutics through the application of highly specialized drug targeting platforms and formulation expertise. If you’re looking for a market leader displaying supreme performance, then perk up to the 70% returns this stock has racked up in 2011.
Raptor has a major catalyst on the horizon with the results of a Phase III study of delayed-release cysteamine in patients with nephropathic cystinosis, which is a rare lysosomal storage disorder in kids that can potentially cause kidney failure. The top-line results are expected to be released at the end of July. The delayed-release of cysteamine was developed to reduce the side effects of the immediate-release versions of the drug.
What I love about Raptor is the unbelievable technical strength this stock has been displaying in just the last couple of months. Shares ran up from a May low of $3.26 a share towards its current price of around $6.25. This stock technically looks like its consolidating before it makes a run at breaking out above its 52-week high of $6.75 a share. A move above $6.75 should send the shorts scrambling to cover their bearish bets.
The current short interest as a percentage of the float for RPTP is a respectable 9.6%. The short-sellers here have also been increasing their bets from the last reporting period by a whopping 126.8%, or by about 1.7 million shares. It would take the bears three days to cover all of their short bets at an average daily volume rate of around 1 million shares.
Raptor Pharma is also on the recent list of Hot Biotech Trades for Second-Half 2011.
Biolase Technology
If you’re looking for a market leader in the dental sector, then take a look at Biolase Technology (BLTI), which designs, manufactures and markets dental, cosmetic and surgical lasers and related products. This stock has been blazing a trail that is leaving the shorts in the dust, with shares up over 125% so far in 2011.
On Wednesday, Biolase announced unaudited preliminary second-quarter revenue. The company said it expects to report net revenue of around $12 million, which is a 104% increase from $5.9 million in the second-quarter of 2010 and a 14% increase from $10.6 million in first-quarter 2011. The company is also set to join the Russell 2000 Index on June 24, which will give it a wider range of visibility among large investment managers.
This stock recently topped out at around $6.10 to $6.12 a share and is now trading close to $3.90 a share. It looks like Biolase wants to test its 200-day moving average of $3.48 a share very soon. If it can hold that level, it might make for a good buying opportunity since the stock is so oversold with a relative strength index reading of 26. That said, I would avoid this name completely and let the shorts feast if it goes through the 200-day on volume that’s stronger than its three-month average volume of 659,000 shares.
The current short interest as a percentage of the float for BLTI is an extremely large 28.6%. The short-sellers have been increasing their bets from the last reporting period by a notable 40.4%, or by about 1.9 million shares. It would take the bears seven days to cover all of their short bets at an average daily volume rate of around 977,800 shares.
Biolase shows up on a recent list of 8 Stocks With Significant Insider Buying.
Oncothyreon
One final market leader that’s heavily shorted is Oncothyreon (ONTY), a clinical-stage biopharmaceutical firm. The company focuses primarily on the development of therapeutic products for the treatment of cancer. Oncothyreon’s cancer vaccines are designed to stimulate the immune system to attack cancer cells, while its small molecule compounds are designed to inhibit the activity of specific cancer-related proteins. This stock has been destroying the bears in 2011, with shares up more than 140%.
This is another biotech market leader that has a huge catalyst on the horizon. Oncothyreon has a Phase III study of Stimuvax, a non-small cell lung cancer vaccine drug that is due out sometime during the second half of the year. Traders are very excited about the potential of this study and many like to call Oncothyreon the next Dendreon (DNDN), which was a speculative cancer stock that hit the jackpot.
Stimuvax is a cancer drug that’s designed to induce an immune response to destroy cancer cells that show a protein antigen that’s found in many forms of common cancers, such as lung cancer, breast cancer and colorectal cancer. The company hopes that success with Stimuvax will lead to its building out the rest of its drug pipeline with other cancer-fighting drugs.
The potential here for Oncothyreon is huge, and all that the longs need now to crush the shorts is some positive data in the coming months. This stock has recently pulled back to a big support zone at around $7.84 a share. If the stock can hold this double bottom level, then shares could be gearing up to squeeze the massive amount of shorts in this name.
The current short interest as a percentage of the float for ONTY is a very large 16.2%. The short-sellers have been increasing their bets from the last reporting period by an extremely large amount of 104.7%, or by about 3.4 million shares. It would take the bears two days to cover all of their short bets at an average daily volume rate of 3.1 million shares.
Oncothyreon shows up on recent lists of 10 Biotech Trades for Second Half of 2011 and 8 Health Care Stocks With Recent Gains.
To see more market-leading stocks that are heavily shorted, includingSodastream International (SODA), Zagg (ZAGG) and Glu Mobile (GLUU), check out the Heavily Shorted Market Leaders portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
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At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.
