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In The November 2010 issue of the Intelligent Investor, we listed 25 stocks with high short interest that we felt were of interest.

These stocks were not necessarily those with the highest short interest, rather they stood out as potential candidates for big moves in coming months for a variety of reasons.

We noted that the presentation should be viewed as an educational segment because our analysis was very superficial. Nevertheless, we provided a brief fundamental and technical analysis of each of these stocks in order to point to what we felt would result in some very substantial moves (up or down) in coming months.

The following passage was taken from the November 2010 issue to describe the purpose and best use of this material:

“Below I have listed some securities with high short interest ratios that I found interesting. Remember, a high short interest ratio increases the chances of a large upward or downward move in shares, depending on material events such as earnings, upgrades/downgrades, etc.

After each security I have listed some brief notes. However, this should by no means be taken to imply a full assessment. Each assessment involved about a 20-second glance at the basic numbers. Using my economic forecasts and estimates for different industries, I made these notes. In many cases, the notes do not consider specific fundamental issues. The bottom line is that this should be taken only as a very crude starting point.”

In the April 2011 issue we conducted a more in-depth analysis of the same securities and discussed their price trend since November.

“In this section I provide an update from November when I listed some stocks that could offer trading opportunities due to a large short interest held by investors in most (but not all) of the following securities.

As I previously discussed, one cannot and should not look at the short interest as the only gauge of investor sentiment. You must also examine the short interest ratio, fundamentals, valuation, contingent liabilities, and other risks.

Finally, it is often very important to factor in your forecast of the overall stock market.

I typically do not advise non-professional investors to ever short securities because it is the most risky investment move one can make.

One of the most reliable indicators for gauging a bearish price performance of securities with a large short interest is the formation of a trend of increasing short interest over the course of a year.

If you make the decision to short securities in the future, you should always wait for critical technical support levels to break down rather than taking a short position due only to a large short interest. The reason for this is two-fold. First, you are charged monthly interest to hold a short position and these fees can add up over time. More important, you could get caught in a short squeeze. Therefore, it is best for most who decide to short a security to pile in once the price decline has been established as confirmed by the technical data.”

Here, we are going to show you an update of these securities since we last mentioned them a year ago. You will notice that the comments we provided were generally bearish in nature (overvalued, poor fundamentals, forward challenges, etc.). This implies that we were pretty much bearish on most of these securities to the extent that we would have felt fairly comfortable holding short positions over an extended period, but ONLY if the fundamentals did not change. In some cases the fundamentals did change. This caused a short squeeze.

As you will see in some of the charts, there were a few of the stocks that soared as a result of a short squeeze. If you were to have covered your short positions in these stocks once they began to squeeze, your total return for the entire short portfolio would have been very, very high.

While we did offer an updated analysis to clients who scheduled a conference call, we did not provide a follow-up analysis for subscribers

Okay, so let’s begin. For each group of 5 securities we will first provide the linear plot followed by the log plot.

How to Short Stocks: Critical Lessons from the Intelligent Investor