Advanced Drainage Systems (WMS): Is Rising Short Interest a Buy Signal or a Warning Sign?

The stock of Advanced Drainage Systems (WMS) has drawn the attention of contrarian investors due to its evolving short interest dynamics and mixed earnings performance. Short interest, a key metric for gauging bearish sentiment, has fluctuated in recent months, raising questions about whether this reflects a buying opportunity or a red flag. By analyzing short interest trends, peer comparisons, and recent financial results, this article evaluates WMS as a strategic contrarian play.

Short Interest Trends: A Contrarian Lens

Short interest in WMS has shown a nuanced trajectory. As of the third quarter of 2025, the short interest stood at 3.67 million shares, representing 5.14% of the public float, with a short interest ratio (days to cover) of 5.33. By November 14, 2025, this had declined to 3.35 million shares (4.37% of the float), signaling reduced bearish positioning. However, a separate report noted a short interest ratio of 8.20 in November 2025 suggesting a potential discrepancy in timing or methodology.

A short interest ratio above 5 typically indicates significant bearish pressure, but WMS's ratio has trended downward from 5.33 to 4.60 in recent weeks. This decline could imply short sellers are covering positions, potentially driving a short squeeze-a scenario where rising demand forces short sellers to buy shares to limit losses, further fueling price gains. For contrarian investors, a moderate short interest (4.3–5.1%) combined with a declining ratio may signal undervaluation or a shift in sentiment rather than extreme pessimism.

Earnings Outperformance and Operational Resilience

WMS's financial performance in 2025 has been mixed but notable. In Q3 2025, the company reported net sales of $690.5 million, a 4.3% year-over-year increase, though net income fell 23% to $82.3 million according to the company's report. However, a separate report highlighted stronger results: non-GAAP earnings of $1.97 per share, exceeding estimates by 19.8%, and revenue growth of 8.7% to $850.4 million. This divergence likely reflects differences in reporting periods (GAAP vs. non-GAAP) or fiscal calendar adjustments.

The company's Infiltrator business unit, a key growth driver, surged 30.3% to $135.3 million in Q3 2025, while domestic allied products grew 3.2% to $161.5 million according to the same report. These gains offset declines in domestic pipe sales (-1.6% to $343.4 million) and international sales (-4.9% to $50.4 million) according to financial results. Despite these challenges, WMS's operating margin expanded to 26.3% in Q3 CY2025, up from 23.9% in the prior year according to earnings data, and free cash flow margin improved to 20.7% from 14.4% according to the same report.

Peer Comparisons: WMS Outperforms in Key Metrics

WMS's performance has outpaced its peers in critical areas. Year-over-year revenue growth of 1.78% in 2025 exceeded the industry average of 1.46%, while its net income contraction of 11.23% was far less severe than the 40.48% average decline among competitors according to industry data. This resilience underscores WMS's competitive positioning in the drainage and infrastructure sector, particularly as demand for stormwater management solutions remains robust.

Contrarian Case for WMS: Balancing Risks and Rewards

For contrarian investors, WMS presents a compelling case. The declining short interest ratio suggests short sellers are retreating, potentially creating a catalyst for a short squeeze. Meanwhile, the company's outperformance in earnings and margins, coupled with strong growth in key business units, indicates underlying value. However, risks persist: international sales and domestic pipe segments face headwinds, and the stock's valuation must be scrutinized against its fundamentals.

A strategic buy could materialize if WMS's fundamentals continue to outperform while short interest remains moderate. Investors should monitor upcoming earnings reports, particularly for guidance on the Infiltrator business and international market recovery.

Conclusion

Advanced Drainage Systems (WMS) occupies a unique position in the market: its short interest trends suggest waning bearish sentiment, while its earnings and operational performance highlight resilience. For contrarian investors, the stock represents a calculated opportunity-leveraging short sellers' retreat while capitalizing on WMS's outperformance against peers. However, as with any contrarian play, due diligence on macroeconomic factors and sector-specific risks is essential.