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

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The best thing about the stock market is that you can make money in either direction. Historically, stock indexes have tended to trend up over the long term. But when you look at individual stocks, you'll find plenty of stocks that lose money over the long haul. According to hedge fund institution Blackstar Funds, even with dividends included, between 1983 and 2006, 64% (nearly two-thirds) of stocks underperformed the Russell 3000, a broad-scope market index.

A large influx of short-sellers shouldn't be a 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, Sept. 15 to Sept. 30

Short Shares as a Percentage of Float

Apartment Investment & Management (NYS: AIV) 40.6%8.3%
United States Steel (NYS: X) 19.4%21.8%
iShares MSCI Emerging Markets (NYS: EEM) 35.3%NM

Source: The Wall Street Journal. NM = not meaningful; the iShares ETF has a regularly changing share count.

Renters paradise
The housing market is a mess, which can only mean good news for one aspect of the housing sector: rentals. Based on data released last week that showed multi-family housing starts rose 51.3% in September, it's evident that builders are attempting to ramp up apartment production in response to a still high foreclosure rate and tight credit market.

With most economic data supporting the notion that rental demand will remain strong for the foreseeable future, bets against apartment REITs like Apartment Investment & Management and Equity Residential (NYS: EQR) look like very poor ideas. Don't let Apartment Investment's high short percentage fool you -- this company is profitable and has easily surpassed Wall Street's earnings estimates in three of the past four quarters. I expect a long winter ahead for short-sellers of this stock.

Iron curtain?
The steel sector truly lives and dies by the sword that is China's economy. When U.S. steel demand dropped off significantly in 2008, steel companies found themselves surprisingly supported by strong Chinese demand for steel products. Now with tangible proof that China's economy is slowing down from years of torrid growth, the steel sector could be shaping up to get flattened.

Things do not look rosy for United States Steel, which is set to report earnings this week. For starters, U.S. Steel has missed analysts' estimates by a mile in each of the past five quarters. In fact, over the past three months, the company's projected quarterly profit has dropped by more than 50%. Even more troublesome, rival Nucor (NYS: NUE) reported results last week which highlighted weaker steel prices and margins, as well as offering weak guidance. I just might have to side with the shorts on this one for now.

The roof is on fire
It's not unusual for investors to overreact to bad news -- but when an entire country is on the brink of default, there is actual cause for concern. So as Greece tiptoes slower than molasses toward a sovereign debt default, short-sellers have been increasing their holdings in iShares MSCI Emerging Markets ETF -- and for good reason!

As fellow Fool Dan Caplinger pointed out just last week, even for someone like myself who wouldn't touch an emerging-market ETF with a 10-foot pole, you'd be doing yourself a disservice by buying the iShares Emerging Markets ETF, which charges a 0.69% fee, when the Vanguard MSCI Emerging Markets (NYS: VWO) ETF follows the same benchmark, yet charges less than a third of that fee. Since I'd clearly recommend avoiding emerging-market exposure until Greece's problems are resolved, I'm going to side with the shorts on this one.

Foolish roundup
This week, we ran with the basic macroeconomic principles of the past few years -- namely that betting against anything housing or emerging markets is probably going to work out well for short-sellers. Word to the wise: Never stand in the way of a macroeconomic trend!

What's your take -- do the shorts have these stocks pegged, or are they blowing smoke? Share your thoughts in the comments section below and consider adding Apartment Investing & Management, United States Steel, and iShares MSCI Emerging Markets to your free and personalized watchlist to keep up with the latest news on each stock.

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 nameTMFUltraLongand on Twitter, where he goes by the handle@TMFUltraLong.Motley Fool newsletter serviceshave recommended buying shares of Nucor. 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.

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