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 number 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 to Dec. 31

Shorts Shares as a Percentage of Float

Stanley Black & Decker (NYS: SWK) 61.9%3.2%
Dr Pepper Snapple Group (NYS: DPS) 37.5%3.0%
Renren (NYS: RENN) 59.8%2.1%

Source: The Wall Street Journal.

A fix for your portfolio
Last week, I took multiple jabs at the housing sector. With nearly 1.4 million foreclosed homes currently on the market for sale and unlikely to move quickly, homeowners are choosing to remodel their homes rather than risk either selling too cheaply or not being approved for a loan in this shaky market.

With home improvement stores Lowe's and Home Depotlogging new 52-week highs, it's clear that remodels are on everyone's mind, and that could bode well for Stanley Black & Decker. The tools manufacturer has surpassed earnings expectations in the past four quarters and is looking to build upon what will likely be 24% sales growth in fiscal 2011. Over the past decade, the company has grown its dividend annually by 5.5% and has increased its annual payout an impressive 44 years running. Even when housing finally does rebound, this isn't the type of company I'd consider betting against. Short-sellers, you've been warned!

23 reasons to buy
Dr Pepper Snapple Group may not tell you what the 23 flavors in its famous Dr. Pepper soda are, but I'd say they're all reasons not to bet against this liquid giant.

There really aren't any good reasons to bet against the sparkling beverage sector, period! Coca-Cola (NYS: KO) has the top global brand name according to website Interbrand. PepsiCo (NYS: PEP) , much like Coca-Cola, has been a model of consistency, with sales increasing in all but one year since 2002. Then there's Dr Pepper Snapple Group, which actually sports a lower forward earnings multiple and a higher dividend yield than both Coca-Cola and Pepsi. I'm not saying I'd choose Dr Pepper Snapple over Coca-Cola or Pepsi, but I am saying that it seems silly to bet against a product that's relatively immune to global economic contraction. Once again, short-sellers, be warned!

...and still they came
It seems that investors are still holding out hope that 2011's IPO dinosaurs will be able to make a miraculous turnaround in 2012 -- but I don't exactly see it that way.

My main beef with Renren has always been that the company can't turn a meaningful profit. Renren is trying to expand its online network at a breakneck pace, and its shareholders are paying the price. During the third quarter, Renren's revenue increased by 57%, but this was dwarfed by a 146% jump in operating expenses. Back in June, I laid out my reasoning behind my dislike for Renren's stock, and not much has changed since then. Renren is still unprofitable, and short-sellers have every right to be skeptical of the stock.

Foolish roundup
This week we simply paid attention to the trends: Home remodels are up, sparkling beverages can win in any global environment, and 2011 IPOs are predominantly still in the doghouse. Follow the trends and you'll often find yourself on the winning side of an investment.

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 Stanley Black & Decker, Dr Pepper Snapple Group, and Renren to your free and personalized watchlist to keep up on the latest news with each company.

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He has an immaculate palate for determining flavors -- too bad he doesn't drink soda. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of PepsiCo and Coca-Cola. Motley Fool newsletter services have recommended buying shares of PepsiCo, Coca-Cola, Lowe's, and Home Depot, as well as creating a diagonal call position in PepsiCo and writing covered calls in Lowe's. Try any of our Foolish newsletter services free 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 a disclosure policy that 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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