Professional short sellers often like to work alone — at least until they’ve built a sizable short position in a stock. 

They realize that a large short interest from other short sellers can create real trouble. Heavily-shorted stocks (also known as “crowded shorts”) can lead to a massive short squeeze that creates havoc for all short sellers as they all start to cover their positions at once. 

Case in point: Radio Shack (NYSE: RSH), the beleaguered electronics retailer, which had a 40 million short sale wager against it as of Jan. 31. That short position represents more than 40% of the trading float and the equivalent of 12 days’ worth of trading volume (known as “days to cover”).

#-ad_banner-#Yet for every RadioShack that causes headaches for short sellers due to a short squeeze, many other heavily-shorted stocks turn into big paydays for short sellers. As an example, I noted a very large short position in Uni-Pixel (Nasdaq: UNXL) back in October, and shares have plunged 47% since then.

The key takeway is that heavily shorted stocks often have a binary outcome. So it pays to look at the most heavily shorted stocks on a regular basis and pursue your own research. Thanks to today’s expanding financial media, there is no shortage of commentary regarding both the bullish and bearish outlooks for many stocks. You can do a deep dive and form your own conclusions.

I like to focus on stocks that have a “days to cover” ratio above 10 days. The fact that short sellers stay in such crowded shorts means they have a high level of conviction. Here’s a look at a dozen high-profile stocks with heavy short positions. 

It’s notable that a pair of agricultural stocks occupy two of the top four slots in this group (which is not a comprehensive list but instead a group of companies that most investors are likely to be familiar with). Lindsay Manufacturing (NYSE: LNN) sells farm irrigation systems while Titan Machinery (Nasdaq: TITN) operates a network of retail stores catering to farmers and construction engineers. Shares of Titan have already fallen far from the 52-week high while Lindsay continues to trade near all-time highs.

But signs are pointing to a tougher year ahead for farm-focused firms. Thanks to a sharp drop in crop prices, the U.S. Department of Agriculture predicts farm income will fall 27% this year. Also, the drought in California, which accounts for 11% of the nation’s farm output, is creating deep financial stress for that state’s farmers. Lower farm revenues typically lead to a deferral of equipment purchases.

Consensus forecasts anticipate a 5% drop in sales for Lindsay Manufacturing in fiscal 2014 and an 8% rebound in fiscal 2015 (to $705 million). Short sellers may be correct in anticipating an even greater drop in sales this year. Back in fiscal 2009, which is the last time farm incomes were depressed, this company’s sales slid 29%. 

Trouble In China?
Cinema technology firm IMAX (Nasdaq: IMAX) is currently a big target for short sellers, likely due to a major competitive threat in China, which has the world’s fastest-growing film market and represents 20% of Imax’s sales. 

A recent report in The New York Times suggests that the China Film Group, which can approve or deny the viewing of any foreign-made film in China, also has a vested interest in pursuing its own large-screen format, known as China Film Giant Screen. That entity represents a threat to IMAX in China now, but could also represent formidable competition in many other markets where IMAX is currently the lone big-screen player. 

IMAX will deliver fourth-quarter results on Feb. 20, and short sellers may be anticipating a sobering conference call as management discusses this looming competitive threat. 

Rising Headwinds For A Gene Tester
Short sellers have had a tough time making profits against breast cancer gene testing firm Myriad Genetics (Nasdaq: MYGN). A year-end plunge, due to a nearly 50% reduction in reimbursement rates from Medicare and Medicaid, has since been met with brighter news. A recent cease-fire between the company and an emerging rival, coupled with a just-announced decision to acquire Crescendo Biosciences, a diagnostic firm focused on autoimmune disorders, has led to a swift share price rebound.

Yet there is another reason why short sellers still want to control half the trading float in this stock: Last summer, the Supreme Court ruled that Myriad could no longer maintain a monopoly in the testing of breast cancer genes. As a result, rising competition from traditional diagnostics firms such as Quest Diagnostics (NYSE: DGX) could eventually lead to even lower testing prices than the ones established by Medicare and Medicaid. 

Management dismisses competitive concerns and believes that they won’t have an impact on near-term results. Merrill Lynch’s analysts hold another view: “While we agree that in the near-term Myriad’s long history in the market and database should help the company in its discussions with commercial payors, we believe that over time both the company’s market share and reimbursement will erode.” Short sellers think that those long-term sales pressures will end up pressuring shares in the short-term.

Risks to Consider: All these stocks could be subjected to a short squeeze if the market’s recent rebound continues.

Action to Take –> Just because these stocks are all heavily shorted doesn’t mean you should follow the crowd. Instead, use these stocks as a source of research ideas, and verify for yourself that these business models are indeed as risky as short sellers contend. IMAX, Lindsay Manufacturing and Myriad Genetics are a good place to start, as these firms face real potential headwinds that may not be fully factored into the stock price.

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