Three Disruptive Companies With Heavy Short Interest

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The stock market is a very interesting place: for every transaction there is a counterparty, meaning that when one someone is buying someone else is selling, and they both believe to be doing the smart thing. Even better, on some occasions investors can explicitly bet against the positions of others, for example buying stocks with heavy short interest.

Observing a big short position as a percentage of float is not a reason enough to make a solid investment decision; however, it can magnify returns when the company has the right fundamentals. If the bears are wrong, and the company is on the road to success, short covering can create spectacular gains as many short sellers rush to buy the stock in order to cover their positions.

These three companies have innovative business models and a big disruptive potential, which means that they could deliver exciting gains if things turn out as expected. In addition to that, heavy short interest could magnify the gains once short sellers realize that they are positioned on the wrong side of the trade. Three disruptive companies to bet against heavy short interest.

Recharging Batteries

Tesla (NASDAQ: TSLA) is a risky investment proposition, the future viability of the high end electric cars manufactured by the company depends on several complex variables, both technical and economical. In fact, the company has recently suffered a setback when the New York Times published a negative review about its Model S sedan.

According to the article, the vehicle didn’t have enough battery juice to complete the trip from Washington DC to New York, and it had to towed from Branford, Conn. Based on this review, the car didn´t perform as expected, since it’s supposed to deliver 265 miles per charge.

But the company has Elon Musk, one of the most successful and innovative leaders in corporate America, on its side. Tesla´s CEO and cofounder was quick to respond and present the company´s logs for the car tested. Musk wrote a detailed blog post explaining how the logs contradict the information in the article on several aspects, and he even said that the reporter from the New York Times, John Broder, intentionally lied about what had happened.

Overall, it seems like Tesla may come out reasonably well from this problem, and the episode can be considered a good show about the company as an investment proposition. The challenges are enormous, but Tesla and its management team are up to them. With a short interest ratio near 37% of the float, this stock may deliver electrifying returns if the business continues growing.

 This Stock Could Pop

SodaStream (NASDAQ: SODA) is disrupting the soft drinks market via its innovative home beverage carbonation systems, the company has delivered better than expected earnings per share in each of the last four quarters, and it will be reporting earnings again on January 20. In spite of its financial performance over the last quarters, and with the stock trading near all time highs, short sellers have not covered their positions, as the stock has a huge short interest ratio in the area of 45% of the float.

The company operates under the razor and blade model, so past success is an optimistic sign about the future. As the company sells more “razors” –soda making machines – that anticipates higher sells of “blades” –syrups and CO2 – which is where SodaStream makes most of its profitability.

The bears in SodaStream have been quite stubborn, maintaining their short position in spite of the company´s better than expected performance and the growing popularity of its products.  This leaves a nice overhang of investors which will need to buy the stock to cover their positions if the company continues delivering better than expected earnings, so this soda maker looks ready to pop.

Open Table for Open Minded Investors

OpenTable (NASDAQ: OPEN) is the leading online restaurant reservation platform, an industry which has proven to be beneficial to both restaurants and customers, and the company has been steadily growing both its network of restaurants and popularity among customers over the last years. The business is doing well, as OpenTable recently reported better than expected revenue and earnings per share for the last quarter.

But there is still a big dose of skepticism regarding the company considering that short interest is above 30% of the float. The bears may be focusing their attention on risks like new technologies and increased competition, but OpenTable seems to be successfully adapting to the mobile boom, and it has the first mover advantage in a very dynamic business.

Competition is always a threat in such an innovative area, especially from bigger players with more resources. But OpenTable is benefitting from the network effect: the service increases in value when it gains more users, and this attracts even more users, creating this way a virtuous cycle of growth and added value. Having a head start is a very valuable asset in this business; in fact, a bigger player may be more interested in purchasing OpenTable than trying to displace it, which would certainly ruin the meal for the bears.

Bottom Line

What has more upside potential than an innovative growth company? An innovative growth company with big short interest, and these tree stocks fit quite well into that description


acardenal has no position in any stocks mentioned. The Motley Fool recommends OpenTable, SodaStream, and Tesla Motors . The Motley Fool owns shares of SodaStream and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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