3 Stocks to Sell Before the Short Selling Ban Is Passed

The practice of short selling is highly controversial and under renewed threat from regulators and politicians who are considering a ban on the practice. Short selling is essentially when traders and investors bet that a stock’s price is going to decline over a certain period of time. These are generally companies that are widely-considered to be stocks to sell, with hedge fund bets against such stocks fueling outsized declines (increasing profits simultaneously).

Many people criticize short selling because they say it enables investors to profit from misfortune. Case in point, the recent crisis among regional banks in the U.S. Short sellers have profited mightily from the banking crisis since it began in March of this year, with analytics firm Ortex reporting that short sellers earned $1.2 billion betting against regional bank stocks in the first two days of May. Now, regulators and politicians are calling once again for a ban on short selling, saying it amounts to market manipulation.

With that said, here are three stocks to sell before the short selling ban is passed.

PacWest Bancorp (PACW)

Many short sellers are upping their bets against U.S. regional banks, even as concerns about the sector ease. Short interest as a percentage of shares outstanding in the SPDR S&P Regional Banking ETF (NYSEARCA:KRE) have increased to 92% from 74% in a little more than a week during mid-May, according to data from analytics firm S3 Partners. Notably, this is bad news for PacWest Bancorp (NASDAQ:PACW), one of the most heavily-shorted regional lenders. Many investors consider this company to be a leading candidate to fail in the not too distant future.

PACW stock is down 74% year-to-date. Almost all of that decline has occurred since Silicon Valley Bank failed in March of this year. Since then, several other U.S. regional banks have also failed or been taken over by federal regulators. Hedge funds and other institutional investors continue to ratchet up their short positions against U.S. regional banks such as PacWest Bancorp. Accordingly, as these bets increase, I think the U.S. banking crisis is likely to worsen going forward.

Icahn Enterprises (IEP)

Icahn Enterprises (NASDAQ:IEP), the holding company of legendary investor Carl Icahn, has seen its stock nosedive since the company was hit in early May with a scathing report by notorious short seller Hindenburg Research. The report claims that Icahn is effectively running his company like a Ponzi scheme, using money from new investors to pay IEP stock’s lucrative dividend, which had a 16% yield before the Hindenburg report. That’s the most generous yield in the S&P 500 index.

Since the Hindenburg report was made public, IEP stock has plunged 34%. Ichan has remained defiant, and claims to be making no changes to his company or the stock’s hefty dividend. With the share price plunge, the quarterly dividend of $2 a share now yields 23%, which is astronomical by most metrics. However, more bad news came for Icahn when it was revealed that federal investigators are seeking information regarding his company’s corporate governance. The company’s stock fell 15% on news of the regulatory investigation.

GameStop (GME)

Shares of video game retailer GameStop (NYSE:GME) are still heavily-shorted and prone to short squeezes. This makes GME stock one of the most volatile securities to own. As recently as March of this year, GameStop’s shares appeared to get squeezed yet again. Indeed, GME stock rose 50% in only seven days before crashing back to earth. While the meme stock craze has subsided, GameStop remains the poster stock for the r/WallStreetBets crowd and one that professional investors and traders love to bet against.

To their credit, management at GameStop is trying to right the ship at the bricks-and-mortar retailer. The company’s most recent earnings were much better-than-expected, leading to a quarterly profit for the first time in two years. News of the profit sent fans of GME stock into a frenzy, resulting in the latest short squeeze.

As is customary, GameStop didn’t provide any financial guidance, and its results can’t be compared with Wall Street estimates because most analysts have thrown in the towel and no longer cover the company or its stock.

On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.