4 Stocks That Could Burn Short Sellers

NEW YORK (TheStreet) -- I have a confession to make.

I have never shorted a stock.

It's not because I think people who short stocks, particularly for a living, are freedom-hating, un-American scumbags.

Not at all. Short sellers help keep the market running smoothly. The ones I know are really great people. I consider them small businessmen and women. It bothers me when fans of battleground cult stocks say nasty things about them.

In any event, for whatever reason, shorting stocks is a bit too rich for my blood. I have never liked dealing with margin. So, I rarely do. I only use margin with relatively predictable and stable strategies such as certain option spreads.

The thought of a stock taking off and running while I'm short nauseates me.

However, like a good LA car chase, there's nothing I like watching more than a short squeeze. Short squeezes -- the perfect illustration of how the stock market can, in an instant, produce winners and losers. When you're long a stock getting squeezed, it's a beautiful thing.

For a time it was not only fashionable, but an incredibly smart move to short Netflix ( NFLX) and Research in Motion ( RIMM).

Now, it's just fashionable for some. And, like many fashions (e.g., constant flip-flop wearing), it's incredibly stupid.

A time comes when traders and investors just need to move on. That can be difficult though. A parallel exists between jumping in too late on a once-juicy short and the allure of low-priced stocks.

Often, investors jump at low-priced stocks that have already made an improbable run. Sirius XM ( SIRI) and Ford ( F) are excellent examples.

Both stocks hit rock bottom. On the verge of extinction, some investors took a chance -- when SIRI traded for pennies and F moved below $2 per share -- and reaped handsome rewards. Most investors watched on the sidelines, unwilling to take on the risk.

But, then, the lottery ticket pays off.

You missed out, but you figure since the stock pulled off the unlikely once, there's no reason why it cannot do it again. In fact, at a higher price with that exciting history behind it, the odds of even more upside have likely increased. It's a bit like dumping a once-perfect boyfriend or girlfriend who went sour, only to take them back expecting a return to the glory days.

With the stock, upside comparable to the original epic bursts doesn't come and you sit in relatively stagnant shares of SIRI hovering around $2 and F in the $9 to $10 range.

A similar dynamic works our minds vis-à-vis the once-juicy short. The smart money, as it turns out, shorted NFLX and RIMM from the triple digits to lows most investors, particularly bulls, never thought possible. You sat it out. Too risky. It can't possibly fall any further. And then it did. NFLX to the $60s. RIMM below $10.

When a stock falls as hard and settles lowly and pathetically like NFLX and RIMM, it's easy to be bearish. But, think about it, while it's not impossible to generate more short profits in either stock -- particularly NFLX, which, presumably, has farther to fall than RIMM -- you quite possibly face more risk at what could be the bottom.

With short interest at roughly 23% and 18% in NFLX and RIMM, respectively, a catalyst (e.g., partnership, buyout, earnings beat) could help drive the stock higher, and a prospective short squeeze could add more upside.

At day's end, I don't necessarily expect great, or even good, things from either company anytime soon, if ever. At the same time, I see no need to take on risk by shorting two well-over-a-yearlong implosions. Investors have already priced so much of the carnage into both stocks.

Netflix reports earnings this week, on Tuesday, at about the same time as Apple ( AAPL). Another company in the video rental space, Coinstar ( CSTR), goes on Thursday.

CSTR sports a short interest of about 31%. This could be the worst time to short the stock. No doubt, if Coinstar misses or otherwise disappoints, you could be in for a big winner. That said Coinstar has shed roughly $10, or 15%, since hitting a 52-week high of $71.82 earlier this month. Do you really want to place the bet -- and that's what it is, a pure gamble -- that the stock sheds another 5% to 15% to make a short position end up worthwhile?

CSTR Chart CSTR data by YCharts

Also, if you subscribe to the belief that you need to know the companies you own or trade really, really well, can you honestly say you have a handle on Netflix and Coinstar's quarterly fortunes? Given the issues at Netflix and guidance mishaps at Coinstar (to the upside as well as downside) over the last year or so, I'm not sure management at either company does, let alone retail or even institutional investors.

Uncertainty. That's a good reason to stay away from a trade, especially on the short side. The market tends to be an uncertain proposition overall. And even more so around earnings. So why bother?

Very few of us have anything close to complete information. Therefore, I tend not to bet against trends that, quite possibly, the big money sits behind.

Consider action in Zynga ( ZNGA) call options on Friday.

With the stock up and trading for $4.80 at Friday's close, 4,681 ZNGA August $5 calls changed hands (against open interest of 22,654) and 3,575 August $5.50 calls traded (against open interest of 1,371). Traders bought a vast majority of these calls at the ask, meaning they're long calls. Presumably, these call buyers anticipate upside when Zynga reports earnings on Wednesday.

Just as I do not like making aggressive directional bets into earnings in general, I am even more wary of doing it on beaten-down stocks backed by a somewhat bullish options market heading into earnings. With ZNGA's short interest at 22%, all of this could signal a disaster recipe for shorts.

You're shooting darts, blindfolded, after six pints when you haul off and go short most stocks, particularly dynamic (in the positive and negative sense) ones such as NFLX, RIMM, CSTR and ZNGA. After factoring in events like earnings, short interest and bullish options sentiment, I'm not sure how most investors can justify taking on this type of risk.

At the time of publication, the author was long ZNGA.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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