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 their worry has some merit.

Company

Short Percentage Increase Feb. 15 to Feb. 29

Short Shares as a Percentage of Float

TELUS (NYS: TU) 883.7%7.9%
Huntsman (NYS: HUN) 46.3%4.8%
Alcatel-Lucent (NYS: ALU) 55.3%0.8%

Source: The Wall Street Journal.


Feeling wired?
Sometimes we forget that when the world's financial system nearly collapsed on itself a few years back, Canada was one of the few countries to survive more or less unscathed. While growth isn't off the charts, Canada offers one of the most stable investment environments around the world. That's what makes short-sellers' obsession with TELUS the past few weeks confusing.

TELUS has missed Wall Street's EPS estimates in two consecutive quarters, so that could be what investors are focusing on, but the company's long-term plan and guidance remain intact. Wireless revenue remains the primary growth-driver, rising by 6.5% and headed for a 43% jump in data revenue, thanks to the surging demand for smartphones and tablets. This wireless segment is what allows TELUS to predict revenue growth in the 4% to 6% range in the upcoming year.

Some are concerned about increased competition from Rogers Communications (NYS: RCI) , but I just don't see it. From an investment perspective, Rogers is levered almost three times as much as TELUS and is currently yielding just a hair less than TELUS (4.1% vs. 4.3%). I think the shorts should look elsewhere for a downside bet.

Chemical attraction
Here's another head-scratcher: What attracted short-sellers to Huntsman in the first place? Huntsman, a chemicals provider, reported its fourth-quarter results in late February, and my only guess is short-sellers were angling for a bad report. Unfortunately for them, they didn't get it.

Huntsman's report, once you get past the one-time gains, signaled continued growth, with revenue improving 9% to $2.63 and an EPS of $0.28, $0.01 ahead of expectations. The most important aspect of Huntsman's report was its ability to pass along rising raw materials costs to its customers. Passing along costs makes or breaks these chemical manufacturers, and Huntsman looks very healthy right now. Tack on a forward P/E of just seven, and you have what might be a very undervalued global recovery stock.

I hope you're sitting down for this...
Brace yourself, because I have some breaking news that I had never expected to say: Alcatel-Lucent looks attractive, and short-sellers may be choosing the wrong time to bet against the company.

As Fool Rich Smith reported last month, a report by Barron's has suggested that private-equity firms might be making a bid for larger telecom space stocks in the coming year and named Alcatel-Lucent as a potential takeover candidate. But there's more to Alcatel than just takeover rumors. The combined entity turned its first annual profit since 2005, as its restructuring is finally paying dividends in the form of lower expenses. With news from larger telecom providers AT&T (NYS: T) and Verizon that they're planning to increase infrastructure spending in 2012, Alcatel-Lucent will benefit from increased business -- and could be a steal of a deal at just nine times forward earnings.

Foolish roundup
This week we took a look at three companies that short-sellers were expecting to report weak results but that simply didn't roll over as the shorts had expected. Betting against sustainable earnings growth is generally not a great idea.

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 these stocks to your free and personalized watchlist to keep up on the latest news with each company.

Also, if you'd like to avoid the potential pitfalls that high short interest can bring, I suggest you download a copy of our latest special report: "The Motley Fool's Top Stock for 2012." In it, our chief investment officer gives you the skinny on a company he has dubbed the "Costco of Latin America." Best of all, this report is completely free, but only for a limited time. Don't miss out!

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. 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.Motley Fool newsletter services have recommended buying shares of Rogers Communications. 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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