Investors Going Short Against Demand Media

Investors may be betting against “content farms” fortunes, if trends seen in Demand Media (NYSE: DMD) are anything to go by.

After its January float, DMD stock out on loan for short-selling peaked at 3.5 percent of its total and has stayed there since mid-February, DataExplorers, an analyst organisation which tracks short selling, told paidContent:UK last week.

“While that may not sound much, it represents 77 percent of the supply of stock that is available to be borrowed,” DataExplorers’ Will Duff Gordon tells us. “It would therefore be hard to short more of the stock.”

In shorting, hedge funds buy stock, out on loan from long funds like pensions, at one price and sell it, hoping the price will fall so they can profit from the difference. That is basically betting against a company’s share price.

So there has basically been a lot of confidence that Demand Media’s stock price will slide following its floatation. “(Short sellers) are active in this stock,” says Gordon, who says the kind of short activity being seen in Demand is high.

The high level of short interest in Demand began even before Google (NSDQ: GOOG) announced it would change its algorithm to focus on “quality” content. Were hedge funds expecting such an announcement? Were they betting Demand was set to be disadvantaged?

Elsewhere, Stifel Nicolaus bank has opened its Demand coverage with a “buy” rating, while Goldman Sachs and Jefferies rate it “hold”, SAI reports.