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, Nov. 15 to Nov. 30

Short Shares as a Percentage of Float

OPKO Health (NYS: OPK) 37.9%13.6%
Tim Hortons (NYS: THI) 1,056.9%4.3%
Signet Jewelers (NYS: SIG) 50.4%4%

Source: The Wall Street Journal.

An epic battle
There's a battle brewing between short-sellers and insiders in OPKO Health, and things are just about to get interesting.

The company, which is engaged in the production of pharmaceuticals and diagnostic equipment, isn't exactly cheap. With the stock at more than 13 times book value and 32 times sales, I would, under normal circumstances, wholeheartedly agree that running in the opposite direction would be the best approach. But that may not be the best approach with OPKO.

Despite OPKO not turning an annual profit once over the past decade, I can't turn my head and ignore the 57 separate insider purchases within the past six months. Given that, on the whole, insider purchases have dominated sales over the last two years, this is encouraging enough for me to give OPKO a chance to prove itself. Revenue has tripled since 2009 -- the next step is turning that elusive first profit.

Fast food, faster profits
Investors haven't been able to get enough of coffee stocks in 2011, and Canada's Tim Hortons is another prime example. Like prime U.S. competitor Starbucks (NAS: SBUX) and international superstar McDonald's (NYS: MCD) , Tim Hortons has been able to provide steady growth to investors for the better part of a decade. But many of the same concerns I've expressed with the valuation at McDonald's are present with Tim Hortons.

For one thing, the company is trading at a book value that's near its five-year high and at a price-to-cash-flow ratio that's well above levels from any time in the past five years. Also, coffee prices have risen dramatically over the last few years, and unless a long-term reversal of trend comes, it could become difficult to pass along those rising costs to consumers. It's for these reasons that I do feel short-sellers have reason to be skeptical about Tim Hortons' performance in the near term.

Internally flawed
Having worked in the jewelry sector for a decade, I have a pretty keen eye for when things aren't looking too hot -- and right now is one of those times. Recently, shares of Blue Nile (NAS: NILE) and Tiffany (NYS: TIF) both fell under the guillotine as they provided subdued guidance. It's very possible that Signet Jewelers could be the next company up.

Like other jewelry retailers, Signet has been dealing with the dreaded combination of high metal prices, rising labor costs, and increasing diamond prices. All of these have the potential to impact margins and restrict Signet's ability to raise prices and/or offer sales. With many mall retailers' sales looking glum, from apparel to high-end, I'm going to advocate avoiding Signet and letting short-sellers have their way.

Foolish roundup
This week it's all about paying attention to what the insiders are doing and what direction industry trends are heading in. It's usually not a great idea to go against the tide of either.

What's your take on these three stocks? Do the short-sellers have these stocks pegged or are they blowing smoke? Share your thoughts in the comments section below and consider adding OPKO Health, Tim Hortons, and Signet Jewelers to your free and personalized 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. He won't be caught dead in a mall after Dec. 31. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong. The Motley Fool owns shares of Starbucks.Motley Fool newsletter serviceshave recommended buying shares of Starbucks, McDonald's, and Blue Nile. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't 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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