Software and Services: Most New Shorts

The global Information Technology sector recorded the highest proportion of new stock loans than any other sector last week. The U.S. Software and Services sector sees average short interest at 6.5% of total shares, which is well above the average across the Russell 3,000 of 4.6%. 19 stocks in a screen on 300 constituents of the sector reached new annual highs in short interest with several recurring names.

Onwards and Upwards

AOL Inc (NYSE:AOL), RealD Inc (NYSE:RLD) and Digital River (NASDAQ:DRIV) have all been subject to rising short interest over a substantial period, despite recent falls in share price.
Following a 30% fall in the share price of AOL Inc, short sellers began increasing their positions in March to reach a fresh high of 16.7% of total shares. The amount of stock on loan accounts for half of the lendable supply. In contrast, institutional investors who lend have been bullish towards this stock, increasing their holdings to 31.8% of total shares.

The share price of 3D specialist, RealD Inc, has plummeted by 35% in less than a month having reached unprecedented highs, following its floatation last year. Although shorts have been building in this stock since January, short sellers have not covered their positions, despite almost all the available stock being out on loan. Short interest currently stands at an unprecedented high of 18.7% of the total shares.

E-Commerce solutions provider, Digital River Inc, has seen its share price come off by 20% from its annual high over the second quarter. However, short sellers, who are historically active in this stock, have increased their positions to an annual high of 20% of total shares. A proportion of this may be arbitrage as the stock has several convertible bonds in issue. Contrastingly, institutional ownership stands at 36.4% of total shares and continues gradually increase.

Application Software

Short interest in application software companies, Synchronoss Technologies Inc (NASDAQ:SNCR) and SuccessFactors Inc (NASDAQ:SFSF) reached new annual highs this week at 7.6% and 14% of total shares outstanding respectively, despite institutional owners increasing holdings in both stocks over the past year as the share price rallied.

At the other end of the scale, short interest in Blackboard Inc (NASDAQ:BBBB) and Fair Isaac Corp (NYSE:FICO) stand at annual lows yet both stocks remain heavily shorted at 25% and 12% of total shares.

Bottom line: Hype following the recent high profile internet flotation has helped propel the average sector P/E Ratio to 38.6 amid talk of a fresh bubble emerging. The sector seems to split investor sentiment with institutional investors remaining faithful while short sellers are active, believing valuables to be unsustainable. One to watch.