New Year, New Thinking….

As even this week we’ve been striving for the allusive α, we have been looking at more interesting ways of investing in CFDs and in particular single stock investing. Moving away from our regular stomping ground of FX, indices and hard commodities – gold in particular.

Read on for more from our Single Stock Strategy Team.


The first thought was related to short interest. If a stock has high short interest it signals that most people have already dived in, implying the stock has already hit its support point, the drop has already happened. Shorting the security now would normally be an error (excluding systemic and macro shocks out side of the example).

Our analysis would be to buy highly shorted stock on the basis that they, should be, now at the bottom. Therefore ready to increase, obviously this is nothing particularly new and with all strategies if it worked perfectly eventually the market would correct itself and the strategy would stop working.

This, on its own, doesn’t seem like particularly smart trading. Therefore some choice needs to go into the selection of which highly shorted stock to buy, this brings us onto the second strategy.

Companies that have recently had a significant drop in value, possibly a ~20% drop and have also had a significant (to the investor) buy in by a company insider, board member, senior member of staff etc etc. Insiders normally have more information about the health of a company and them buying some or more stock in the company signals that they think it’s under valued at its new value. Also insider user groups with more stock can only be a good thing for a potentially under valued stock, more stock increases the alignment of individual benefits/utility with the companies goals/utility (or profit!). This is, unfortunately, corporate finance 101 and not some high flying financial engineering algorithm, but not everything needs to be that complicated.... 

So now we have a list of stocks that have high short interest and a list of stocks that have had a recent drop in price and have been bought buy insiders. The perfect situation would be for one company to top both lists, but its obviously not that easy, picking the right one(s) never is!

One way of deciding could be taking strategy 2’s list and highlighting which companies have up and coming news, the insiders who have just bought could be looking long run value (ie the company is worth more than it currently is) or short run (ie the news coming up is good news and therefore worth buying). Therefore the probability of the stock’s price level bouncing back after the original drop in price is increased.

When we make our first picks, or for that matter our first lists we’ll share them here first….