This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Stay Away From These Four Heavily Shorted Stocks

So where else are the shorts focused? Here's a quick look at four stocks, and why the shorts see downside ahead.

1. Chesapeake Energy (CHK)

Even after responding to shareholder requests for a more responsible board of directors, and even after a nice rebound in natural gas prices, short sellers still hold 85 million shares short (which, admittedly is down 5 million from mid-June but still ranks as the 11th-highest short position on the NYSE). Shares, near $19, are actually showing some resilience, even after the Wall Street Journal continues to run a series of stories questioning the company's unstated financial relationships and perhaps overstated gas reserves estimates.

Chesapeake's bulls and bears both make a solid case, and shares are either wildly overvalued or undervalued, according to who you listen to. I can't make heads or tails of it myself. For further insight on this stock, you may want to read Nathan Slaughter's views on Chesapeake in his Scarcity & Real Wealth newsletter if you haven't already.

2. Rite Aid (RAD)

Shares of this lagging drug store chain have fallen from above $2 in late March to a recent $1.33, which would typically lead short sellers to cash in their winning bet. But they actually boosted the short position by six million shares to 58.8 million at the end of June.

Any time you see a stock trading below $2 with a large short position, you might wonder if this is a candidate for bankruptcy. Will that be the case?

Well, Rite Aid is sitting on more than $6 billion in debt. This means the retailer needs to pay out $130 million in interest expense every quarter. That's a larger sum than operating income, which means that Rite Aid continues to generate quarterly net losses. You can't do that in perpetuity if you have $6 billion in debt.

3. Arch Coal (ACI)

After scoring a big hit with Patriot Coal, short sellers are targeting this debt-laden rival. As is the case with Rite Aid, Arch Coal has to make huge quarterly interest payments -- roughly $75 million per quarter. Trouble is, the coal miner had just $54 million in operating income in the first quarter -- yielding a net loss -- and second-quarter results are likely to be even worse as coal prices keep on dropping.

2 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,099.25 +28.03 0.16%
S&P 500 1,979.87 +2.07 0.10%
NASDAQ 4,512.2410 +6.3890 0.14%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs