Shorts Are Piling Into These Stocks. Should You Be Worried?
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.
Short Percentage Increase Since July 29
Short Shares as a Percentage of Float
|PepsiCo (NYS: PEP)||72.1%||0.8%|
|Telefonica (NYS: TEF)||109.2%||NA|
|Oshkosh (NYS: OSK)||86.1%||4.7%|
Source: WSJ. NA = not available.
It's beyond me who in their right mind would bet against global beverage and food giant PepsiCo, but a marked 72% jump in shares currently held short signals something could be afoot.
Relative to main rivalCoca-Cola (NYS: KO) , Pepsi's growth seems to be lagging in developed markets. However, as detailed in Pepsi's most recent earnings results, worldwide beverage volume did climb 5%, and profits for the company rose by 18%. North American consumers are tightening their wallets, according to Pepsi, but the company's diverse portfolio of products should be enough to counter many of these negative effects. With the market wildly hiccupping up and down lately, you could do far worse than having this dividend aristocrat in your portfolio.
European companies that trade in the U.S. have been regular visitors to the "short list" recently. Because of continued sovereign debt troubles and economic contraction created by austerity plans in the European Union, there is cause for concern as to whether companies in that region will suffer. Thus far, for Telefonica shareholders, the answer to that question has been, "Yes!"
In its latest quarterly filing, Telefonica pointed to a 16% drop in earnings relating primarily to a decrease in domestic demand, a rise in competition, and an increase in operating costs. However, not everything from Telefonica signaled a doomsday forecast.
For instance, the company's landline and wireless operations in Latin America soared 18.4%, led largely by growth in Brazil. Most importantly, total customer access rose by 6.2%, meaning the company is able to reach a broader and more diverse audience of customers. With $81 billion in net debt, it's clear that concerns exist, but when a telecom company grows its dividend by more than 650% over the course of just eight years, I tend to cut it some slack.
In the tank
Pharmaceutical companies weren't the only group to take it on the chin when the U.S. passed legislation to raise the debt ceiling. Defense companies are scrambling to lock in contracts since it's extremely likely that a large chunk of the $2.2 trillion in cuts the government is looking to make over the next decade is going to come out of the defense sector. We've already seen huge tumbles from industry giants Northrop Grumman (NYS: NOC) and Lockheed Martin (NYS: LMT) . One company very much at risk is Oshkosh, a manufacturer of heavy-duty vehicles for the U.S. military.
Analysts have cut Oshkosh's 2012 earnings estimates nearly in half since the debt deal. Even worse, the company is dealing with an expected 24% decline in revenue this year following a 68% drop in profits in its most recent quarter. With defense cuts looming, short-sellers have every right to be cautious about an already weak Oshkosh .
Not to beat a dead horse, but dividend-paying companies consistently seem to be unfairly targeted by short-sellers. Macroeconomic issues are important, but global brand names are considerably more likely to survive an economic downturn than smaller companies.
What's your take on these companies? Do the short-sellers have it right or are these companies worth buying? Share your thoughts in the comments section below and consider adding PepsiCo, Telefonica, and Oshkosh to your free Motley Fool watchlist.
At the time this article was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLongThe Motley Fool owns shares of PepsiCo, Coca-Cola, Telefonica, Lockheed Martin, Northrop Grumman, and Oshkosh.Motley Fool newsletter services have recommended buying shares of PepsiCo and Coca-Cola, as well as creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter servicesfree for 30 days.We Fools may not 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.
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