Brokers Face Their Worst Nightmare

Depending on the company and the shareholder base, it's also possible to have more than 20% of the float short and still not be near 100% of the lendable float. For example, the spinoff of Blockbuster (BBI - commentary - Cramer's Take) from Viacom (VIA.B - commentary - Cramer's Take) has resulted in a large lendable Blockbuster float. That's because many shares are held in retail margin accounts. While Blockbuster is heavily shorted at 31% of the float, it's still possible for shorts to borrow shares at a reasonable cost.

Is Overstock an Attractive Value?

The excessive short position in Overstock has uncovered short sellers scrambling to find Overstock shares to borrow in the open market. Yields of 25% are being offered in the open market and, even at that rate, shares are scarce. An agent lender for one of the world's largest asset custodians (with several trillion dollars of assets) told me that it doesn't have a single lendable Overstock share.

The irony here is that Overstock is now attractive to both value investors and to institutions that facilitate short-selling.

Value investors can figure out easily enough that this stock is too cheap. Big money is made by buying into companies that are enveloped by negativity and on the cusp of profitability. I'll go into detail in my next column on how to value Overstock and why robust profitability is coming for this particular model.

The stock is attractive for institutions that lend to short-sellers because they can loan the shares and generate a 25% yield. Since there is essentially no supply of stock to borrow, it makes sense for a lending institution to buy nonlendable stock -- such as stock in certificate form or in an IRA account -- and convert those shares into lendable stock, capturing a 25% yield in the process.

Even if a bear is convinced Overstock is headed down, it's irrational to short a stock at a 25% annual cost in an effort to capture a maximum 100% gain. It's completely implausible that the shorts stand to make a 100% gain (before costs). Talk to any reputable venture capitalists and they will tell you that Overstock's category dominance (far and away No. 1 in inventory liquidation) has enormous value.

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At time of publication, Alsin and/or ACM was long OSTK and BBI, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor, and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.