Whenever you’re analyzing a stock, one of the statistics you want to take a look at is the size of the outstanding short position. A ‘short’ stock, you’ll remember, is one that has been borrowed and sold by someone expecting the stock to go down. You can find this information at many different websites like Yahoo Finance.
Why does it matter? Well if there is a large short position (I’d define that as a short position that is more than 5% of the outstanding shares) it means many people expect the stock to decline. On the surface, that sounds like a bad thing. But remember the most money is made by buying stocks when everyone hates them, and selling them when everyone loves them. So a big short position by itself may be good news over the long run. The question you have to answer is, why are so many people short? This may take some digging. It could just be a couple of hedge funds betting against the company, or it could be a widespread belief that the stock is really overpriced.
In order to find out, you may have to talk to brokers, read analysis from Value Line and Morningstar, etc., even search message boards. If people are negative because the company isn’t making any money, then that’s bad news. But if it’s because of future guessing about bad news for a fundamentally sound company, that may be doubly good. First, it means all the bad news is probably already in the stock. Second, eventually the shorts will have to cover (buy back) their position, and that means there will be less stock available, driving the price up more.
You certainly wouldn’t invest based just on an outstanding short position. But it can be one more indicator that you’ve found a real gem.