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HolidayBuyer's Guide
Tech Industry

Net stocks stymie short-sellers

Sellers may regret moves to predict Yahoo and Excite will stumble as the stocks in those companies charge ahead.

Short-sellers increased their stakes in Yahoo and Excite in mid-June over the previous month, but those moves may come back to haunt them, as the stocks in those companies have charged ahead in recent days.

As of June 15, short-sellers increased their interest in Yahoo by 10 percent, to 5,727,265, up from 5,199,525 shares held on May 15, according to data released today by Nasdaq. Excite saw its short-seller interest increase to 2,247,729 shares, up 43.7 percent from 1,564,170 shares.

In their highly volatile business, short-sellers bet that a company's stock will fall. They essentially borrow shares with the intent of acquiring them when the price drops, keeping the difference between the lower price at which they purchased them and the higher price at which they were borrowed. Each month, Nasdaq releases figures on the number of shares sold short for companies that trade on its market.

In the last period reviewed, the short positions in Lycos and Infoseek declined. Infoseek's short interest dropped 11.3 percent in June, to 2,821,638 shares, while Lycos saw a 20.5 percent decline, to 1,400,623 shares.

Unlike Yahoo, AOL, and Infoseek, Excite was the only company in the group of rivals to see the number of days to cover its short position change, from one day in May to two days in June, according to Nasdaq.

Here's how the accounting process works: If 100 shares were shorted in Excite and the average daily volume in the company's stock was 100 shares, then it would take one day to cover. If, however, the average trading volume was 50 shares, then it would take two days to cover the same short-selling.

Short-sellers get caught in a dangerous squeeze if they find that the stocks they have shorted are rising instead of falling. This often leads them to snap up shares in an effort to offset their losses, putting even more cash into their investments.

The activity of short-sellers has taken on a new importance during the last week, as Internet stocks have soared to all-time highs. Yahoo, for example, once again pushed up its 52-week high, closing at 148.75 today.