JetBlue's ( JBLU) megagrowth story has been so wildly popular that the upstart has replaced tried-and-true Southwest Airlines ( LUV) as the most popular low-cost carrier among investors. But a look at short interest in JetBlue points to some risks. After New York-based JetBlue said during its first-ever shareholder meeting on May 21 that it expected annual growth exceeding 55% in 2003, equity analysts became more bullish on the stock, despite its lofty valuation. Over the last two weeks, UBS Warburg and Standard & Poor's have upgraded shares, while Bear Stearns reiterated its positive outlook, saying the company deserves to trade at a premium to its peers. Sixty percent of analysts rate JetBlue a buy, twice the number who rate Southwest a buy. But while most analysts prefer JetBlue's story, the level of short interest reveals that many believe the company could be a riskier proposition than Southwest. Short interest against JetBlue shares -- a bet that the company's stock price will fall -- far outweighed that of its rival, even though Southwest had a higher valuation. According to the most recent data from Bloomberg, 12.3% of JetBlue's shares were shorted through May 8, while just 1.6% of Southwest's shares were shorted, lowest among any of the airlines. And even though Southwest's price-to-earnings multiple had jumped from 52 to 67 in the two months leading up to May -- a sign the stock could be getting too pricey -- the level of short interest actually fell. Experts believe the rising level of short interest in JetBlue shares could be a complicated hedge by those who are long Southwest -- or it could be a bet that JetBlue is overvalued at current levels. "Hedge funds engage in some very sophisticated strategies, so the short may not be reflection that the company is bad," said Tom Taulli, author of TheStreetSmart Guide to Short Selling . "But another reason is that people do think that JetBlue is overvalued. That tends to be harbinger of things to come, seeing short interest like that. On balance, it's probably a negative."
Risky, but Rewarding Too
However, short interest works two ways, since a rising stock can trigger a short squeeze, in which people who have shorted the stock are forced to cover their bets with stock at higher and higher prices. Although a sign of risk, shorting also increases the potential rewards, with unexpected good news triggering an explosive upside move.