Do the Shorts Know Something You Don't?

Before you go, we thought you'd like these...
Before you go close icon

Since everyone loves a winner, it's reasonable to assume that everyone hates a loser -- everyone but short-sellers, at least. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into profits.

These top companies on the Nasdaq stock exchange had some of the largest percentage increases in shares short. Combining that with the collective intelligence of Motley Fool CAPS, we'll see which of these companies Fools believe have the power to make short work of short-sellers.


Netgear
(NAS: NTGR)
1.81.610.2%4.9%*****
Chelsea Therapeutics (NAS: CHTP) 7.37.04.5%12.8%**

Sources: wsj.com. Share counts in millions.


Of course, this isn't a list of stocks to buy -- or short! These stocks could have serious problems that warrant their short interest, but they might also be stricken by short-term troubles. Only Foolish due diligence will tell you for certain; our 180,000-strong CAPS community offers just such a good place to start.

Gearing up for growth
Short-sellers may have been piling into Netgear in hopes that its earnings results would fall short of expectations, but the fourth quarter - and 2011 -- surpassed what analysts were anticipating. What knocked the stock back were analyst downgrades and a cautious outlook on the coming year. I'd say Wall Street (and the short-sellers) is underestimating the network equipment maker.

Retailers like Best Buy and Staples may not have been stocking its products as deep as they had been in the past, preferring two or three deep instead of the usual four or five, but it was gaining against competitors like Cisco and D-Link. CEO Patrick Lo says Netgear gained market share last year at three to four times the average market rate across the board, and though the company doesn't think it will maintain that pace in 2012, it's still going to outrun the market's rate of growth.

At around $38 a share, I find Netgear to be very attractively priced while it trades at an enterprise value-to-free cash flow ratio of 12, making it fairly cheap on that basis as well. Indeed, across a number of ratios, the equipment maker is putting up an attractive front. For that reason, I've joined with more than 2,200 CAPS members in rating Netgear to outperform the market going forward.

Add Netgear to the Fool's free portfolio tracker to be notified of when it steals even more shelf space from its rivals.

Enough to raise your blood pressure
Do-or-die day is looming for Chelsea Therapeutics as the FDA is set to render a decision this week on its treatment for low blood pressure, Northera. An FDA advisory panel surprised the market last week by recommending the drug for approval despite the regulatory agency's staff reviewer raising significant safety and efficacy concerns.

Chelsea's stock had plunged ahead of the panel's decision as everyone anticipated a negative outcome, but it shot 61% higher when the surprise announcement was made. That might have caught a number of short-sellers short and helped drive it up a little more, but understanding the capriciousness of the FDA, don't be surprised if they've held their ground. The agency is well-known for disregarding its panels' recommendations and in a situation where significant concerns have been raised, I'd be surprised if the FDA gives Northera the nod. The Fool's Brian Orelli isn't so sure, though, and is hopeful since the drug seems fairly safe overall.

The stock has given back some of its gains, and I've changed the longtime outperform rating I had on Chelsea to underperform over the next few months because I just don't see it winning here. The mood on CAPS is much more upbeat where member TXKL expects approval and 89% of those rating the stock see it outperforming the market: "Chelsea has a committee approval by 7-4 recommending FDA approval for Northera. The FDA is voting on or before 3/28 and it is expected to be approved," wrote TXKL.

Add Chelsea to your watchlist and let us know in the comments section below or on the Chelsea Therapeutics CAPS page if you think I'm going to be proven wrong.

Don't sell yourself short
Share your views with the CAPS community: squeeze 'em till it hurts, or short 'em till the sun don't shine?

If you're looking to squeeze out more ideas, there's just one stock The Motley Fool thinks will break all the rules to win big. Check out the new special report "Discover the Next Rule-Breaking Multibagger." You can get free instant access by clicking here!

At the time this article was published Fool contributorRich Dupreyowns shares of Best Buy and Cisco Systems, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Staples, Cisco Systems, and Best Buy.Motley Fool newsletter serviceshave recommended buying shares of Staples and Netgear. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners