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, Oct. 14 to Oct. 31
Short Shares as a Percentage of Float
|Philip Morris International (NYS: PM)||25.9%||1.2%|
|Juniper Networks (NAS: JNPR)||46.3%||2.6%|
|Teavana (NYS: TEA)||22%||50%|
Source: The Wall Street Journal.
Lately, I've been warning against making long-term bullish bets on tobacco companies that derive a majority of their revenue in the United States. However, outside the U.S., all bets are off. In fact, I'd suggest bearish bets being placed against a company like Philip Morris International should come with their own warning label about possible loss of wealth.
Unlike U.S. sister Altria (NYS: MO) , which has a non-diversified revenue stream (at least geographically) and faces a government that is becoming increasingly hostile toward its products, Philip Morris offers sin-stock investors a perfect solution. With revenue spread throughout the world and the company able to adapt to (in many cases) less stringent government regulations, Philip Morris offers a much more stable revenue stream and less implied legal risk than Altria. So once again, even though I'm not a big fan of the tobacco sector, I still feel if you bet against Philip Morris, you're probably going to get smoked.
Monkey see, monkey do
Prior to Juniper Networks' largest networking rival Cisco Systems (NAS: CSCO) reporting earnings last week, I would probably have agreed with short-sellers that they at least had a 50-50 shot of being right -- but not anymore. In a case of monkey see, monkey do, Cisco Systems dispelled all fears about a continuing slowdown and may have given the green light to Juniper optimists.
For the quarter, Cisco noted that government orders weren't bogging down revenue nearly as much as the company originally anticipated and that Cisco had won new contracts over smaller rivals like Juniper. While this might seem negative for shareholders of Juniper, I see just the opposite. This means that telecom companies are out there spending their money on infrastructure upgrades, and I think that's a win-win for the entire sector. With Cisco's report out of the way, I wouldn't dare bet against Juniper.
To say that Teavana, which currently has 179 stores, can even be put in the same ballpark as Starbucks and its nearly 17,000 stores is just silly. It's considerably easier to grow sales by 36% as Teavana did last quarter when you're starting from a smaller revenue figure. Growing to Starbucks' size and still cranking out 10% revenue growth -- now that's impressive! At 46 times forward earnings and with only one earnings report under its belt, I'd suggest laying off the chamomile and letting the shorts have their way with this one, at least for now.
Sticking with a blend of growth and value is usually going to be an easy way to defeat a growing short position. Keeping value in mind, Philip Morris and Juniper fit the bill, with Teavana being a reach even in an alternative universe.
What's your take on these three companies? Do short-sellers have these companies pegged or are the shorts blowing smoke? Share your thoughts in the comments section below and consider adding Philip Morris International, Juniper Networks, and Teavana 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 has nothing against tea, but considers himself a coffee guy. 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 Starbucks, Cisco Systems, Altria, and Philip Morris International while also creating a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Starbucks, Cisco Systems, and Philip Morris International. 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.