Although short selling -- the practice of selling borrowed shares with the hope of repaying the loan by buying back the shares at a lower price -- goes against the American belief that stocks always go up, I have long been fascinated with it. Short Stories discusses what works, what doesn't, and what some of the leading lights in shorting stocks think about its opportunities and threats. I describe possible short trades and seek your comments and questions for story ideas. I don't offer any investment advice and I don't trade on any of the posts I write.
About 13 months ago, I suggested selling short shares of NovaStar Financial (NYSE: NFI) when it traded at a split-adjusted $116 a share. If you had followed that advice, you would have made a tidy profit -- it now trades at $1.79. If you covered your position today, you'd have a return -- before adjusting for the cost of margin escrow -- of 64x your investment.
According to The Associated Press, NovaStar laid off 85% of its people last week and its stock will be delisted on Thursday. Prior to the delisting, NovaStar had claimed that Wachovia Corp. (NYSE: WB), its lender, had given it a break by lowering NovaStar's minimum required liquidity from $30 million to $22 million.
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