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% of stocks -- nearly two-thirds -- 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 look at three companies that have seen a rapid increase in the amount of shares currently sold short and see whether traders are blowing smoke or whether their worry could have some merit.
Short Percentage Increase Dec. 30 to Jan. 13
Short Shares as a Percentage of Float
Disney (NYS: DIS)
Marriott International (NYS: MAR)
Nokia (NYS: NOK)
Source: The Wall Street Journal and author's calculations.
Don't bet against Mickey
I may not be a huge fan of the Disney brand, but I sure as heck wouldn't dare bet against Mickey Mouse and the amazing momentum Disney is bringing into 2012. Last year's 50% dividend hike marked the largest dividend increase in decades for Disney. In addition, the theme park and media giant reported record revenue and profits. Fueling Disney's growth have been its media networks, ABC and ESPN. In its most recent quarter, media network sales rose a modest 9%, with profits jumping a more impressive 20%.
But as a person who holds football near and dear to my heart, the company's pact with the NFL for broadcasting rights through 2021 is what has me sold. With football still being the most-watched sport in the U.S., it makes sense for Disney to latch on to the sport at almost any cost. At just 12 times forward earnings, Disney could have much more upside still left in the stock. Short-sellers, consider yourselves warned!
Short by default
Leisure companies are always a tough buy recommendation to make in a stagnant economy. They become especially tough to make when companies like Carnival (NYS: CCL) are busy dealing with a PR nightmare. The tragic accident of the Costa Concordia in Italy has made for rough sailing for much of the cruise sector. Likewise, bad news in the hotel sector tends to send signals out that short-sellers happen to love.
Marriott International recently had a $170 million loan put on risk-watch by Wells Fargo (the originator of the loan) because the cash flow for two of its four Ritz-Carlton hotels attached as collateral to this loan is running in the red. Wells Fargo placed the risk of default on this loan as medium to high. Aside from this loan, there isn't any reason to be excited about Marriott in the first place. Arne Sorenson, who is scheduled to take over as Marriott CEO in March, recently described sales in Europe as "weak," and sales growth is expected to range from 1% to 2% through 2013. I'm going to side with the short-sellers on this one.
Say it with me: $1.38 billion fourth-quarter loss! Some pundits on Wall Street referred to this quarter as a turnaround. My response to that is, "What, did they turn around and actually find a way to get worse?"
For the quarter, revenue slumped 21% with smartphone sales plummeting 23% as Nokia gave way to both Apple's (NAS: AAPL) iPhone and Google's Android. In fact, Nokia only managed to sell 19.6 million smartphones in the fourth quarter versus the 28 million it sold last year. Apple, by comparison, moved a staggering 37 million iPhones during the same period, which was a nearly 120% increase over the year-ago period. Nokia's momentum is pointing in the wrong direction, and CEO Stephen Elop hasn't exactly broken the company out of that slump yet either. Until definitive changes are made, the short-sellers will continue to have their way with Nokia.
Sometimes it's as simple as understanding that the trends tend to perpetuate themselves. Disney's business is doing well, while Marriott and Nokia are struggling. Until we see a definitive change in those trends, it's best to simply roll with the tide.
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 Disney, Marriott International, and Nokia 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. He often wonders, if it's such a small world after all, then why are there so many SUVs? 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 Apple, Wells Fargo, and Google. Motley Fool newsletter services have recommended buying shares of Apple, Disney, and Google, as well as creating a bull call spread position in Apple and a covered strangle position in Wells Fargo. 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 puts up a "Do not disturb" sign.
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