Short selling, also known as shorting or going short, is a trading method in which assets are borrowed and subsequently sold in order to profit from the stock's decline in price. Investors borrow securities from brokers and sell them on the open market to carry out a short sale. The investor can purchase the asset back at a reduced price, return it to the broker, and keep the difference as profit if the price of the security drops. If the price increases, the investor will have to pay more for the security and will suffer a loss. Hedge funds and institutional investors make the majority of conventional short sales or bets that a stock price will drop to protect their interests from falling stock prices or to speculate that shares are overpriced. On the other hand, activist short sellers investigate companies to identify targets they claim have questionable accounting or business procedures, distribute information (often in secret), and, if all goes according to plan, drive down the share price. Columbia University law professor Joshua Mitts' 2019 research, Short and Distort, discovered more than $20 billion in stock mispricing related to hundreds of anonymous attacks on public businesses between 2010 and 2017.
The S&P 500 has increased by 15% so far this year, which is indicative of a strong market performance. As a result, short sellers for the 500 companies in the index have faced difficulties and possible losses rather than being in the winners' circle. The amount of short interest in an average S&P 500 member is at its lowest point in almost twenty years, according to Goldman Sachs Group Inc.HFR statistics stated assets in funds with a short bias fell to $4.6 billion from $7.8 billion in 2008, during a time when the total size of equity hedge funds almost tripled in size. In the US, the Securities and Exchange Commission (SEC) regulates short selling to guard against misuse and ensure that it continues to benefit the market during sharp declines in stock prices.
In 2023, the SEC adopted new regulations to promote transparency in short-selling, mandating investors to record short positions and companies to submit records of share lending activity to FINRA, a self-regulatory body that polices brokers. In the aftermath of the Video Game Retailer controversy, short sellers had lost over $6 billion, according to analytics company S3 Partners, as a result of retail investors pushing up the stock price. Hence, short selling came under renewed congressional scrutiny in 2021.
However, hedge funds represented by the Managed Funds Association stated that the restrictions may disclose investors' methods. "Investment advisers will face more risk when selling short, which will harm investors, market participants, and market efficiency," Bryan Corbett, its chief executive officer, warned.
Despite the challenges that short sellers face, there are several advantages to short selling for both the economy and the capital markets. Research from both theoretical and empirical perspectives has demonstrated that short selling improves price efficiency, liquidity, and corporate governance, hence improving the overall state of the market.
According to statistics from S3 Partners, the Commercial Banking Company’s failure made it the most successful short bet of the year, producing paper profits of $1.6 billion. In second place was the Pharmaceutical and Biotechnology Company, a maker of vaccines, which fell 45% in 2023. Short sellers, who bet on the stock's collapse, made $1.1 billion from this company.
However, short sellers faced significant losses by betting on mega-cap technology businesses, which rose in 2023 and drove a wide comeback in stocks. The E-Mobility King caused the greatest agony for short sellers, incurring $12.2 billion in paper losses in 2023 as the electric car maker's price almost doubled. AI Chipmaker, which lost $11.2 billion to bearish traders, was next on the list, which included the majority of the so-called Magnificent Seven, semiconductor giants, and Coinbase, as bitcoin rebounded. The previous year was brutal for the market. As per S3 Partners' research, short sellers on Wall Street have lost around $195 billion so far this year, which almost balances out the nearly $300 billion in gains they experienced during the 2022 market crisis. In total, the group lost $242 billion in 2020 and around $142 billion in 2021. Although short selling carries risk, investors may be able to lower this risk and make profits by keeping an eye on equities that hedge funds are shorting.
Methodology:
For our list of stocks that hedge funds are shorting, we picked stocks with institutional ownership (which also includes hedge funds) of over 40% and float shorted over 30%. We curated our list based on institutional-ownership percentage.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter's strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A medical technician examining a device used in laser and energy-based aesthetics systems.
Among the stocks hedge funds are shorting is Cutera, Inc. (NASDAQ:CUTR) which offers dermatological and cosmetic solutions to medical professionals throughout the globe. Cutera has a float short of 38.47%, and it has 66.30% institutional ownership as of June 20.
In its first-quarter 2024 financial report, Cutera, Inc. (NASDAQ:CUTR) revealed consolidated revenue of $38.8 million, a 29% decline from Q1 2023. The company reported a significant sequential rise in AviClear revenue, which was primarily caused by a shift in the North American business model and the successful launch of an international limited commercial release. The company projected $160 million to $170 million in sales for 2024 and predicted a lower-than-expected $55 million to $60 million in cash and cash equivalents at the end of the year. The effective introduction of new products like xeo+ and programs like Cutera Academy, which seek to improve customer service and increase worldwide market presence, are among the company's key strengths.
According to Insider Monkey’s Q1 FY2024 data, 11 hedge funds were long on Cutera, Inc. (NASDAQ:CUTR) at the end of the quarter, which decreased from 20 funds in the prior quarter. Glenn Russell Dubin's Highbridge Capital Management is the largest stakeholder in the company, with 32.69 million shares worth $13.36 million.
Overall CUTR ranks 10th on our list of the 15 stocks hedge funds are shorting. You can visit What Is Short Selling In Stock Market? 15 Stocks Hedge Funds are Shortingto see the other stocks that are on hedge funds’ radar. While we acknowledge the potential of CUTR as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CUTR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
