What does the short-interest ratio of 5% of a company tell in comparison to 20% of the industry average?
Well, just off the cuff we can say that in such case the company is being shorted less than the industry average. It could be due to a variety of factors. Possibly because it is looked upon more favorably by the market. But you’d need more information. Such as the short interests for peers in the industry - do some industry peer companies have 50% short interest but others have close to 0%, which mathematically ends up to the 20% overall industry average? What is the float size and average daily trading volume of this stock versus industry peers? How might shorting stocks play into a hedging strategy for investors into the industry, versus being a purely negative view? Have the stocks with higher short interests seen recent high stock performance versus expectations or the industry average, so people are looking at mean reversion instead of being “more negative” on those 20% or more companies and “more positive” on this 5% company? Looking only at the relative short interest doesn’t mean necessarily that people are bullish on the 5% company, in other words.
Usually people look at short interest as an invitation to look further into a situation or sector, rather than a stand-alone buy or sell signal. Does this help? Cheers
Thank you for your reply and it’s quite elaborated
In the context of the question I asked
A stock short interest ratio 5% and stock B 50% and industry average 20%
Apart from that because of other factor stock A is overvalued compared to B
I am.not able to understand the short interest ratio part in the explanation provided in the answer provided.
Will you be able to explain now?
In a real-life analyst situation, you likely would approach this situation from a 360-degree inspection point of view, to learn more details.
In a more simplistic test question situation, it seems from your description that stock A is overvalued compared to stock B, so if you were doing pairs trading you would go long stock B and short stock A. So then why aren’t more folks shorting stock A already? Maybe it isn’t a popular or liquid stock compared to other stocks. Could be any number of factors I guess. Just because a stock is overvalued doesn’t mean it will get a lot of “attention” from the market if it’s small/illiquid or listed on a smaller exchange or based in a different country where currency exchange rates can fluctuate making short positions risky etc. Or it could be a wall street bets meme stock where shorts have been historically squeezed and now shorts are afraid of it. Or company A could be a stock that’s rumored to be an acquisition target which is why it’s currently overvalued compared to Company B who is, for it’s part, rumored to be at risk of a government fine or sanction that hasn’t been announced or clarified yet. Does this help?
Cheers - good luck - you got this👍
Yes, thank you