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% of stocks -- nearly two-thirds -- 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 look at three companies that have seen a rapid increase in the amount of shares currently sold short and see whether traders are blowing smoke or whether their worry could have some merit.

Company

Short Percentage Increase Dec. 15-Dec. 31

Short Shares as a Percentage of Float

Best Buy (NYS: BBY) 22.8%13.2%
United Rentals (NYS: URI) 37%26.5%
RadioShack (NYS: RSH) 32.9%15%

Source: The Wall Street Journal.

Big-box bellyaching
The problems at Best Buy and other big-box retailers have been well chronicled. E-tailing giant Amazon.com (NAS: AMZN) has been able to swoop in with lower overhead costs and undercut Best Buy on nearly all of its electronics. Many pundits have even suggested that Best Buy is merely a testing area where consumers try out new products only to eventually buy them on Amazon. Perpetually declining TV sales are also killing Best Buy's margins.

Despite all of this and many Fools insisting on avoiding Best Buy altogether, I think Best Buy is in the midst of reorganizing itself toward a higher-margin platform of tablets and mobile products. Adapting its business won't take place overnight, so there will be hiccups along the way, but the key point is that Best Buy remains strongly profitable and has strong cash flow to alter its business strategy as it sees fit. I don't see much downside now that Best Buy has affirmed its earnings guidance and trades at a minuscule six times forward earnings. Short-sellers may want to look elsewhere for gains.

$4.2 billion buy -- ouch!
Wall Street seemed to champion United Rentals' $4.2 billion buyout (including debt) of RSC Holdings (NYS: RRR) last month, but call this Fool not very impressed.

United Rentals is coming off its first earnings beat in October after three straight EPS misses, and investors have responded by lifting the stock near its 52-week high. In fact, the stock has more than doubled in the past four months. Despite United's rosy outlook for 2012, I can't help but be worried about its decision to purchase the currently unprofitable RSC and assume $2.3 billion worth of RSC's debt. With a staggering $3 billion in debt already on its balance sheet, the additional $2.3 billion from RSC is a backbreaker. Consumers are renting instead of buying at the moment, but as soon as that trend shifts, United could be in big trouble. I think short-sellers have every right to be skeptical of the stock here.

You've got questions...
While RadioShack may have the answers their customers want, they have left Wall Street wanting answers for years of poor performance. As I opined in April, I'm curious as to how RadioShack even stays in business. It has been late to the party on multiple occasions, only recently realizing that mobile products and tablets are the way to go for brick-and-mortar retailers. Another way to think about this is that if the Street is so negative about Best Buy, imagine what they think of RadioShack, which seems to be miles behind Best Buy in innovation.

RadioShack has seen sales stagnate for a decade while gross margin has been on a steady decline since 2007 -- not to mention its quarterly EPS misses have grown in magnitude for four consecutive quarters. Even with the stock appearing cheap on paper, there's plenty of room for those estimates to fall even further given "The Shack's" recent history of earnings misses.

Foolish roundup
This week we found three companies that all have major questions left to answer. With a heavy short presence in each one, all three bear further watching.

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 Best Buy, United Rentals, and RadioShack 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 honestly can't remember the last time he was inside a RadioShack store. 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 Best Buy, RadioShack, and Amazon.com.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com and writing covered calls in Best Buy. 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 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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