The Hidden Risks: Stocks That Defy Market Gains

Certain stocks that are difficult to borrow and sell short are likely to underperform the market, according to a study published in The Review of Financial Studies. The study suggests that when short sellers face obstacles in borrowing shares or high borrowing costs, these stocks tend to trade at higher valuations. The analysis of hard-to-short stocks over several years found that they significantly underperformed the market. The study provides a list of "Constrained Winners" and "Constrained Losers" stocks that are currently difficult to sell short, with the former overreacting to good news and the latter underreacting to bad news. While shorting these stocks may be challenging, the research suggests that they are likely to underperform in the coming year. However, factors such as the ability to withstand short squeezes and borrowing costs should be considered before engaging in short selling.