Shorts Are Piling Into These Stocks -- Should You Be Worried?

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The greatest aspect of the stock market is that money can be made in either direction. Historically, stock indexes have tended to trend up over the long term, but it's a fairly even split between winners and losers. This leaves investors with a pretty even shot of making money by being long or selling short.

A large influx of short sellers shouldn't be an immediate damning factor to any company, but it could be a red flag from traders that something may not be as cut and dried as it appears. Let's take a look at three companies that have seen a rapid increase in the amount of shares currently sold short and see if traders are blowing smoke or if their worry could have some merit.

Company

Short Percentage Increase Since June 30

Short Shares as a Percentage of Float

Visa (NYS: V) 65.4%1.8%
PotashCorp (NYS: POT) 115.0%2.1%
Advanced Micro Devices (NYS: AMD) 23.8%17.9%

Visa
Visa might at first strike you as an odd addition to be a bulls-eye for short sellers, but the entire credit card sector has been facing considerably uncertainty over debit fee limits and how that could potentially affect the bottom lines of these companies. As of now, I'd call this a genuine case of blowing smoke.

Visa's earnings report last week signaled that better-than-expected growth should continue at least in the near term. A recently introduced network participation fee for its merchants marks a big step away from the per-transaction fees that Visa had traditionally charged and could give this company the fuel to move even higher. Visa's peers Discover Financial Services (NYS: DFS) and American Express (NYS: AXP) also trounced analyst estimates by an uncharacteristically large amount recently, so I feel it's safe to say this sector is not in any danger of slower growth.

PotashCorp
PotashCorp saw the amount of shares currently held short more than double in just 15 days, which begs the question: What could be drawing the ire of so many short sellers? Based on the company's most recent earnings report, I think I have the answer.

PotashCorp, a company that specializes in fertilizer production, handily beat consensus estimates last week on a 62% jump in revenue. The driving force behind this growth was favorable pricing of the three nutrients found in its products: phosphate, potash, and nitrogen. While this earnings report was bullish, I'd be worried the company has almost set the bar too high. Commodity prices have been rallying faster than a speeding locomotive, and it'd be foolish to assume they won't take a breather at some point in time. For now, I'd say the jury is out on PotashCorp, but consider it on watch.

Advanced Micro Devices
Unlike Visa and Potash, which have a relative small short ratio, AMD is a blaring target for the bears. Last week, I didn't mince my words when I presented 10 reasons to say no to AMD and apparently traders seem to feel the same, increasing the amount of outstanding shares sold short by 24% in just 15 days.

An inconsistent history of earnings featuring 10 annual losses in the past 15 years, coupled with a series of technological innovations followed by failures, have cast a near-permanent cloud over AMD's future. Every time the company seems to be gaining market share on Intel (NYS: INTC) , AMD seems to find a way to take two steps back. The company currently has no CEO, pays out no dividend, and has a shrinking graphics division -- a recipe confirming that short sellers may be onto something here.

Foolish roundup
Keeping a close eye on a company's short ratio can offer invaluable insight into a skeptics mind. While short sellers may not always have the story right, it's best to be able to see both sides of the story that can, in the end, help protect your portfolio from unnecessary losses.

Should shareholders of these companies be worried that short sellers have taken a liking to their stock? Share your thoughts in the comments section below and consider adding Visa, PotashCorp, and Advanced Micro Devices to your watchlist to keep up on the latest news with each company.

At the time this article was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong. The Motley Fool owns shares of and has purchased calls on Intel.Motley Fool newsletter services have recommended buying shares of Visa, Discover Financial Services, and Intel, as well as creating a diagonal call position in Intel. Try any of our Foolish newsletter servicesfree for 30 days.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat never needs to be sold short.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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