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. 31 to Nov. 15

Short Shares as a Percentage of Float










Source: The Wall Street Journal.

The path more traveled
Maybe short-sellers didn't get the memo that went out signaling bullishness across the board in the railroad sector. As fuel prices have risen and oil has (at least temporarily) recaptured the $100-per-barrel mark, more businesses are turning to the more fuel-efficient railroads to ship goods.

For Union Pacific, it was business as usual in the third quarter, with the company marking all-time record highs for net income, revenue, and operating ratio. Every shipping segment showed impressive growth, with management remaining upbeat about the company's prospects. Perhaps more damaging to the pessimists' case, Union Pacific raised its dividend for the second time this year and continues to repurchase its shares on the open market. I'm not quite sure what the short-sellers see in Union Pacific or the railroad sector for that matter, but this is one safe haven that'll run you over if you bet against it, based on what I'm seeing.

You want me to buy into what...?
When I say "mail," you're probably thinking, "How quickly can I run in the other direction?" We don't often think of mail-based companies as investable -- especially given the gross mismanagement we've witnessed from the U.S. Postal Service over the past decade. But as mail transitions away from the post offices and toward a digital platform, a niche market exists for postal equipment and software suppliers Pitney Bowes and (NAS: STMP) .

Admittedly, Pitney Bowes hasn't done a great job of selling itself to optimists. Revenue has been slowly dwindling since 2008, and according to management, many of its customers are simply delaying orders due to economic uncertainty. Still, with a relatively safe dividend now yielding 8%, Pitney Bowes is going to attract the attention of income-seeking investors. Although I'm not sold on the company's near-term prospects as is evidenced by my underperform call on CAPS, that dividend is enough to make me glad I'm not a short-seller over the long haul.

Murder, she wrote
It doesn't really matter whether labor unions, rising fuel prices, an aging fleet of planes, a crushing load of debt, or a combination of all four were responsible for AMR's demise. All that matters now is that you stay far, far away from the carcass.

AMR seemed doomed after the tragic terrorist attacks 10 years ago. Its crushing debt load seemed insurmountable. In addition, the rise of regional, low-cost airlines focused on undercutting the majors in price, including Alaska Air (NYS: ALK) , Allegiant Travel (NAS: ALGT) , and JetBlue (NAS: JBLU) , made the going practically impossible and definitely unprofitable for AMR. Now facing the prospect of shareholders being completely wiped out during its bankruptcy reorganization, I can only advise letting the shorts do what they will with what I suspect will be a pink sheet stock in no time.

Foolish roundup
Things were pretty much black-and-white this week. Betting against companies with all-time-record-high profits or soaring, but stable, dividend yields is generally not a great idea. Avoiding a company that declared bankruptcy last week -- a fantastic 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 Union Pacific, Pitney Bowes, and AMR to your free and personalized watchlist to keep up on the latest news with each company.

At the time thisarticle was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. He vaguely remembers what the inside of a post office looks like. 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 Allegiant Travel.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.

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