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 number of shares currently sold short and see whether traders are blowing smoke or whether their worry could have some merit.

Source: The Wall Street Journal.

In your (North) Face!
Who in their right mind would bet against VF? Honestly, the company is on fire after purchasing Timberland in June. It reported a 23% jump in revenue in its most recent quarter, with every business segment showing growth.

Not only is VF growing organically and via acquisition, but it's bringing shareholders along for the ride. The company recently bumped its dividend up by 14%, the 39th consecutive year it has raised its dividend, and is now yielding north of 2%. Its dividend has grown by an annualized rate of 17% over the past six years. There's a reason Eric Wiseman came in at No. 4 on my list of the Best CEOs of 2011, and these figures prove it. In my opinion, short-sellers are nuts to be betting against VF here.

You'll know their name
Seriously, one day longs will know their name, but for now it appears Sun Life is a deer in short-sellers' headlights. The strong move by short-sellers into the stock does make some sense. Just last quarter, Sun Life warned that it was going to change the way it values its variable annuities and segregated fund insurance liability contracts, which would result in a $550 million to $650 million fourth-quarter charge. This merely looks like short-sellers piling into the stock ahead of Sun Life's Q4 report.

On the other hand, the reason I don't like the move relates to the company's conservatively run portfolio and near-certain return to profitability in 2012. Remember, the losses in 2011 were one-time events. What isn't a one-time event is that absurd 7.2% yield that Sun Life is currently sporting. With the company realigning its strategy to focus on Canada and Asia, two regions of stable growth, I see no reason to be betting against Sun Life here either.

Warning, warning!
Limited Brands and the entire apparel sector are a completely different story than VF and Sun Life. Just last week, American Eagle Outfitters (NYS: AEO) and J.C. Penney (NYS: JCP) were both pummeled when they lowered their fourth-quarter outlooks dramatically because of excessive discounting. Even though Limited Brands avoided a warning like many retailers did last week, I don't think the company is out of the woods just yet.

With much of the sector trading at a single-digit forward P/E, I can't say Limited looks attractive at a forward P/E of 14 or sporting $3.6 billion in debt. There's far too much risk and not enough reward built into the stock at these levels, and I'd just as soon let the short-sellers have their way.

Foolish roundup
This week it's all about establishing the difference between long-term and short-term trends. VF and Sun Life look well-positioned for long-term growth, while Limited looks like it could be nearing a short-term top.

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 VF, Sun Life Financial, and Limited Brands to your free and personalized watchlist to keep up on the latest news with each company.

At the time thisarticle 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. The Motley Fool owns shares of Limited Brands. 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.

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