Do the Shorts Know Something You Don't?

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 New York 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 if Fools believe these companies have the power to make short work of short-sellers.

Renren (NYS: RENN)






Penn West Petroleum (NYS: PWE)






Source: 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 a good place to start.

Registering doubt
Launched as "China's Facebook," the country's demographics make it tempting to think Renren can capture the same growth trajectory that Facebook has. The number of Chinese Internet users hit 513 million at the end of June, according to the China Internet Network Information Center, while the social-networking site reported last quarter that its number of registered users grew 33%, to 137 million people, and monthly unique log-in users jumped 58%. So the potential for growth is there.

But a culture of censorship and control permeates China's Internet culture, and a new effort to enforce a real-name registration process could dampen the growth of the social-networking movement. SINA's (NAS: SINA) popular Weibo microblogging site would certainly be impaired, as it has been a primary beneficiary of the movement. And although Renren would seemingly have an advantage, since it already uses such a system, it also suggests there's an upper limit on how far it can expand. Fear of being detained for expressing one's views is a real concern. Consider that despite being China's largest search engine, Baidu (NAS: BIDU) killed its own Twitter-like service after requiring real-name registration resulted in failure.

Last quarter, Renren reported higher revenues but wider losses on rising costs, and that might not change when it reports earnings next month. The rising number of shares sold short might give it a brief boost as positions are covered, but a sustained momentum higher seems hard to imagine at this point. Its saving grace is the high cash balances it carries, a positive point CAPS members like ly007007 and davidgolf point to in believing Renren will surprise the market.

Add the Chinese social-networking site to your watchlist to see if it can overcome the significant barriers intrusive government policy has placed before it.

An unconventional opportunity
The advanced drilling techniques that created the boom in unconventional sources of natural gas and oil have the potential to reduce our dependence on foreign sources of fossil fuels, even if they don't completely eliminate it. Tight-oil development, otherwise known as oil from shale formations, could produce as much as 2 million to 3 million barrels of oil per day by 2035, according to a government sponsored report from the National Petroleum Council.

Penn West Petroleum has a dominant position in four of Canada's five largest tight-oil resource plays: the Cardium, Carbonates, Spearfish, and Colorado. It's also one of the top five producers north of the border, ahead of PetroBakken and Pengrowth Energy, although those companies also have considerable pull in Canada.

It doesn't take much to convince CAPS investors of Penn West's potential, as 97% of those rating the oil and gas explorer think it will continue outperforming the broad market averages. You can tell us on the Penn West Petroleum CAPS page or in the comments section below if you agree, then follow along by adding the stock to the Fool's free portfolio tracker.

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?

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At the time thisarticle was published Fool contributorRich Dupreyholds no position in any company mentioned.Click hereto see his holdings and a short bio.Motley Fool newsletter serviceshave recommended buying shares of SINA and Baidu. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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