Investing 101: Stocks Under $5 Seeing Short Covering

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Do you like low-priced stocks? Stocks with a market price under $5 are usually highly volatile because even small changes represent a larger percentage of the price. One way to trade them is by riding a period of short covering. Read more to learn about these terms.

Short transactions
When investors short sell a stock, they stand to profit if the share price falls. To short sell a stock, the investor must borrow the shares from someone else. Doing so implies the use of margin, or borrowing ability from the brokerage. Because of this, the investor must go through background checks, so it usually means that they are a more sophisticated investor. 

When those investors begin to buy back the shares they are borrowing, short covering occurs. This could mean that the investors believe the stock has reached its lowest point, and might be on the way back up. So in general:


Short selling = bearish perspective on the stock
Short covering = bullish perspective on the stock

Business section: investing ideas
Below is a list of stocks trading from $1-$5 that have seen short covering over the past month. Do you think the short-sellers are right? (Click here to access free, interactive tools to analyze these ideas.)

1. First Bancorp (NYS: FBP) : Operates as the holding company for FirstBank Puerto Rico that provides a range of financial services and products to retail, commercial, and institutional clients in Puerto Rico, the United States, and the British Virgin Islands. Market cap at $888.95M, most recent closing price at $4.32. Shares shorted have decreased from 1.04M to 639.78K over the last month, a decrease which represents about 2.21% of the company's float of 18.12M shares. Days to cover ratio at 2.16 days.

2. MGIC Investment (NYS: MTG) : Through its subsidiary, Mortgage Guaranty Insurance, provides private mortgage insurance to the home mortgage lending industry in the United States. Market cap at $672.76M, most recent closing price at $3.33. Shares shorted have decreased from 41.00M to 36.91M over the last month, a decrease which represents about 2.06% of the company's float of 198.88M shares. Days to cover ratio at 5.39 days.

3. LDK Solar (NYS: LDK) : Engages in the design, development, manufacture, and marketing of photovoltaic products and development of power plant projects. Market cap at $375.97M, most recent closing price at $2.87. Shares shorted have decreased from 18.33M to 17.68M over the last month, a decrease which represents about 1.03% of the company's float of 63.05M shares. Days to cover ratio at 10.12 days.

4. Merge Healthcare (NAS: MRGE) : Provides health information technology interoperability solutions. Market cap at $366.77M, most recent closing price at $4.03. Shares shorted have decreased from 6.95M to 6.02M over the last month, a decrease which represents about 3.49% of the company's float of 26.62M shares. Days to cover ratio at 7.55 days.

5. Entropic Communications (NAS: ENTR) : Designs, develops, and markets systems solutions to enable connected home entertainment. Market cap at $350.24M, most recent closing price at $4.01. Shares shorted have decreased from 12.99M to 11.47M over the last month, a decrease which represents about 1.76% of the company's float of 86.21M shares. Days to cover ratio at 8.26 days.

Interactive chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


 

At the time this article was published Kapitall's Danny Guttridge does not own any of the shares mentioned above. Price data from May 2.The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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